The divergence between business conditions and confidence in the monthly surveys from the National Australia Bank showed up dramatically yesterday as confidence fell to a two year low last month, but conditions improved to their best since 2009.
The NAB says that confidence usually track conditions, but they diverted noticeably last month.
The NAB said business conditions index jumped 5 points to +11 in August, after a small fall in July, lifting the (smoothed) trend index to its highest level since late 2009.
But the confidence fell in August (from +4 to +1), unwinding all the post May budget gains and hitting its lowest level since mid-2013 (just before the September 2013 Federal election).
Of the two moves that was both the most interesting, and the least important to the economy.
Confidence eased due to a number of reasons, most notably the market volatility (which saw our market down more than 6%, China’s 12.5% and a big fall in the value of the dollar, plus commodities).
The NAB said the improvement in business conditions points to a further improvement in the non-mining economy, even as jitters in financial markets weigh on confidence.
The NAB explained the fall on “recent financial market ructions and China growth concerns (which) appear to have had an unnerving effect on business – albeit not enough to send confidence into negative territory (a good outcome given the degree of market volatility)”.
"Confidence eased in most industries, although mining and construction recovered some of last month’s sharp declines.”
But for business conditions a very different story as “both trading conditions and profitability recorded a notable improvement, but the employment index remains at very subdued levels," the NAB said yesterday.
“This outcome adds to the mounting evidence that AUD depreciation and record low interest rates are having the desired effect and helping to offset the weakness in mining.
"Even so, outcomes vary significantly by industry. Services sectors continue to outperform, while retail has improved considerably.
“The ‘bellwether’ wholesale industry remains weak, but probably reflects margin squeeze due to AUD depreciation as other leading indicators (aggregate forward orders and capacity utilisation) have improved,” the NAB added
The NAB said in terms of its view on the economy there are risks to the outlook stemming from financial market volatility and a slower China, “At this stage they are balanced by stronger local momentum in the non mining sector.
“There is little case on purely domestic grounds for easier monetary policy, with areas of economic weakness unlikely to respond to lower rates, although external risks suggest the RBA will retain an easing bias for some time," the bank said yesterday.
