Downtrend in conditions extends into 2019. Conditions: down 3pts to +4. Confidence: down 2pts to +2.
The NAB business survey indicates that both business conditions and business confidence weakened in February – with both at below average levels.
The business conditions index fell by 3pts to +4. This is down sharply from conditions prevailing over the first half of 2018, when the index averaged +18.
Business confidence fell by 2pts to +2.
This soft update is a significant development.
The survey was conducted in late February (from February 25 to March 1). Typically surveys conducted at this time of year are more reliable than those taken during the often volatile holiday season of December / January.
Also, this survey suggests that the sharp loss of economic momentum that emerged from around mid-2018 has extended into 2019. Hopes of a New Year rebound appear to be forlorn.
Soft conditions extending into 2019 fits with our reading of the economy. Westpac is forecasting real GDP growth to be 2.2% in 2019, a below trend pace, which will see the unemployment rate move higher.
Importantly, the housing downturn continues and will weigh on conditions during 2019. In addition, wages growth is still weak, with real wages broadly flat, pointing to ongoing soft consumer spending.
Business conditions details for February are: trading conditions down 2pts to +8; profitability down 4pts to +1; while employment moved sideways, at +5.
Businesses willingness to hire and to invest is another important consideration for the outlook this year.
The survey suggests that employment conditions currently are consistent with near-term job gains of +19k per month – which is only a little below the 2018 average of +22k and would likely hold the unemployment rate steady.
We note that employment conditions have eased, down from +11 over the initial 9 months of 2018. Given the typical lags between activity and the labour market, we expect employment conditions to weaken over coming months.
On investment, the survey points to downside risks.
Capacity utilisation weakened over the past three months, falling to a just below average level. The capital expenditure index fell further to be at a three year low and is approaching the lowest level since the 2014/15 period.
Retail business conditions plunged even further, from -14 in December and January to -24, the weakest 3 month period since 2013. Conditions in the key construction sector slipped below zero, to -5. The last time the construction sector index was consistently in negative territory was in 2013.
By state, conditions weakened further in NSW, to +3, the softest reading since 2014. In Victoria, conditions stabilised, at +7, well down from +21 over the first half of 2018.
A sharp loss of momentum in NSW and Victoria is significant given that employment strength of late has been confined to these two states. Across the other four states, employment has fallen by 0.2% since mid-2018.
