As seen above, business conditions are rising, but at a much slower rate than surging confidence.
The NAB’s survey looked at where conditions were improving (NSW and Queensland) and the sectors, plus the impact on the wider economy.
The Survey clearly shows continuing strong momentum in domestic demand in Q3 with surprisingly high (unrealistic) confidence levels.
That said there are emerging signs of slowing new orders and weakening labour market conditions.
Critically, it also shows little sign of higher levels of capacity utilisation – with business still not prepared to fire up capacity to meet the strength of demand.
Rather it appears that de-stocking and increased imports remain the preferred avenues to meet the shortfall. Also there appears to have been little sign of a significant kick up in longer term investment intentions.
Against that, there are clear signs that manufacturing and construction are benefiting from the Government infrastructure programs – including the schools initiative – and the FHOB.
Putting all this together suggests that GDP in Q3 will again record moderate growth – notwithstanding signs of slower retail activity post the cash drops.
We continue to expect that slowing to become more pronounced in late 2009, especially as the RBA moves to increase rates and unemployment continues its upward path. It is worth noting that with inflation expected to continue to fall into 2010, RBA rate rises will result in a significant kick up in real interest rates.
Thus while the current momentum in the housing market is likely to be sustained in 2009 we expect higher real rates and increased unemployment to moderately weaken house prices in 2010 (see chart below right hand panel) – and keep consumption on a relatively subdued path.
The government’s cash handouts have been effective in preventing a major crash in consumption.
However, going forward we still expect consumption to weaken till early 2010 and then grow relatively moderately (around 2½%) during 2010.
Turning to business conditions by industry, the big improvers in recent months have been construction, manufacturing and mining.
Against that, retail is starting to deteriorate in trend terms with the passing of the Government’s cash handouts while personal and recreational sector activity continues to flat line at low levels – reflecting both the higher AUD and reluctance among consumers to spend in discretionary areas such as clubs and pubs. In short much of the pattern of industry level activity appears to reflect the timing of the Government’s stimulus package.
Again, the kick in confidence is very similar (both in change and level terms) across states – in keeping with the Australian-wide nature of the Government policy initiatives.
It is notable that the previous power state of Western Australia is reporting the weakest conditions while the improvements have been most marked in New South Wales and especially Victoria.
Queensland activity has also improved noticeably in recent months.
However, overall, the recent trend of the biggest states reporting the strongest business conditions continues.
It is worth noting firstly that the August Survey came out of the field on Friday 28 August.
That is, it predated both the RBA’s decision to leave rates unchanged and the stronger than expected GDP estimates for Q2 2009 (especially for the non farm sector).
As such the further significant improvement in business confidence is quite remarkable.
Confidence levels are now considerably above long term average levels and indeed are at the highest level since October 2003.
Nothing that happened last week would, in our view, have lessened those readings – indeed it may well have added to confidence levels.
The other feature of the results is the homogeneity of the levels of confidence across sectors. In brief the confidence levels are at similar levels everywhere – and it is quite remarkable that a sector like manufacturing is now more confident – albeit marginally – than any other sector.
While these outcomes are very encouraging, to some extent we suspect that current confidence levels may be starting to get to unrealistic levels – just as they fell to overly pessimistic levels earlier in the year. Certainly the gap between confidence and actual business outcomes (and indeed business intentions for capital expenditure) points in that direction.
On actual business outcomes – as measured by business conditions – the Survey results for August are for further modest improvements (up 3 to +4 index points) – that brings the index back to the levels last reported in mid 2008.
The fact that recent strong gains have been maintained, does however point to quite strong demand continuing into Q3 2009. In August the results were very much driven by strong gains in trading (up 8 to +12 index points) and especially profits (up 10 to +11 index points).
These results return trading conditions to around longer run average levels, while profits are now somewhat above those longer run averages.
Despite the continued improvement in sales and profits the Survey suggests that the labour market weakened somewhat (down 6 to -11 index points).
It is also noticeable labour markets conditions remain significantly below longer term averages – and indeed are still around the levels reported at the bottom of the 2000/01 slowdown.
In a similar vein, while the recovery in forwa
