Aust: business conditions & confidence, December. Conditions collapse, a ‘false read’ or a watershed moment? Conditions: down 9pts to +2. Confidence: unchanged at +3.
The NAB business survey for December is a headline grabber. Business conditions have collapsed, with the largest monthly fall since the GFC. Declines were broad-based across states and industries.
The business conditions index fell by 9pts to be at +2, a below average reading (for the monthly survey, dating from March 1997). Conditions are down sharply from the first half of 2018, when the index averaged +18.
This is the softest reading since September 2014, prior to the recent strong housing upswing gathering a head of steam.
Business confidence was steady at +3, a below average reading, down from +9 on average in the first half of 2018.
The key question – is the December update a ‘false read’ or a watershed moment?
The survey was conducted from January 8 to 14. (Typically the survey is conducted in the final week of the month but that’s not feasible for December.)
As always, caution should be taken when interpreting data over this period – with most still on holidays data can be particularly volatile at this time of year.
At face value, the fall in business conditions over the second half of 2018 suggests a significant slowing in the economy.
If the December update is accurately describing conditions across the Australian economy then this is a watershed moment. For policy makers, economic growth forecasts of 3% plus would need to be marked materially lower.
The turnaround in the housing sector is a key development. New home building activity has swung from strong gains over the first half of 2018 to declines in Q3 and beyond.
Dwelling prices in Sydney and Melbourne have pulled-back, following sizeable gains, and consumer sentiment slipped into the pessimistic zone in January (just, at 99.6).
The global economy lost momentum during 2018 with trade slowing and uncertainty increasing. However, a plus is that some key commodity prices (eg iron ore) remain elevated.
Business conditions detail for December are: trading conditions down by 8pts to +7; profitability also down 8pts to 0; while employment fell by 5pts to +4.
The survey suggests that the employment index is consistent with jobs growth, near-term, at a still solid 18k per month. However, we’d note that if business conditions do settle at around +2 then the employment index is likely to soften.
Forward orders weakened further, down 1pt to -1. The capacity utilisation rate – having strengthened over recent years – was still at an above average reading, albeit moderating somewhat during 2018.
By industry, conditions in retail plunged in December (to -15), moderated in recreation & personal (to +8) and slumped over the past two months in the previously strong sectors of construction (to 0) and manufacturing (to -1). It may be that firms were slower than usual with sending through new orders over the holiday period.
By state, business conditions have moderated significantly across the mainland, with December readings of: NSW and Victoria, +5; Qld, +1; WA, -2; and SA, -16.
