The Economy: Business Conditions, Confidence Mixed

Another mixed report from business about confidence and conditions in October.

The National Australia Bank's monthly survey found a slight softening in business conditions last month, but there was also a small rise in confidence, perhaps triggered by confident forecasts ahead of last week's rate cut.

The news comes after solid retail sales, car sales, a slight upturn in private home approvals, but weak commercial building data and new home sales.

Department store sales are weak (Myer updates its performance on Friday), according to the September quarter sales report from Westfield.

But other types of retailing are a bit stronger, especially food and cafes and takeaway.

In fact the data, and the NAB's latest survey confirms the firm to weak outlook for the economy issued last week by the Reserve Bank, although the NAB says it's a little more optimistic than the central bank about growth for this year and 2012.

The survey showed that business confidence rose to 2 in October, from -1 in September and a two-year low of -9 in August, while conditions fell to -1 in October from +2 in September.

Business conditions weakened a little in October, edging 3 points lower to -1 index point, but remained a little above the level recorded two months ago, according to the NAB.

The bank said that while conditions were a little below average levels in the month, trend conditions have been fairly flat and are consistent with and economy that has broadly marked time over recent months.

"The deterioration in conditions in the month reflected broad-based falls in employment conditions (down 4 to -1 point), profitability (down 2 to -4 points) and trading conditions (down 1 to +3 points)," the NAB said.

NAB chief economist Alan Oster says the bank has tentatively pencilled in a further rate cut from the RBA in February on the basis that inflation and activity may remain subdued in the short term.

"We have revised core inflation (ex carbon tax) forecasts lower, with inflation of 2% expected over 2012, drifting up to 3% by mid-2013.

"We tentatively expect another 25bp rate cut in February 2012, although this will be data dependent.

"We are generally more bullish on near-term growth than the RBA's latest forecasts; we see year-average growth of 2% this year (RBA 1.75%), around 4.25% in 2012 (RBA 4%) and 3.25% in 2013 (RBA also 3.25%), but we have lower near-term inflation.

"Longer term, we expect above target inflation to re-emerge," the bank said yesterday.

Business conditions by industry. A majority of industries reported either weaker or unchanged business conditions in October, with the only exception the construction industry.

Conditions deteriorated most significantly in mining - likely reflecting heavy falls in bulk commodity prices and some base metals prices in the month - while transport & utilities also recorded a sharp decline.

Overall, business conditions remained strongest in mining (+12), followed by recreation & personal services and finance/ business/ property (both +7), while conditions were weakest in manufacturing (-10), retail (-8) and wholesale (-5).

Business conditions by state. Queensland was the only state to report an improvement in conditions in the month, albeit only small.

Conditions deteriorated sharply in Tasmania (on a small sample), followed by WA and SA. In levels terms, WA and NSW were the only states to report an expansion in conditions in the month, while conditions contracted heavily in Tasmania and SA. In trend terms, WA remained by far the strongest state, followed by NSW, while SA and Tasmania were the weakest.

Business confidence continued to improve in October and the NAB said that at the time the monthly survey was taken, speculation about interest rate reductions had increased, while the Australian dollar had risen, after the sharp fall in September.

Furthermore, the outlook for Europe appeared to have improved, with European Finance Ministers devising plans to recapitalise the European banks, while favourable data out of the US had allayed fears of a double dip recession and implied an economy showing tentative signs of a recovery.

"Taken together, these factors are likely to have supported strengthened optimism in the month.

"Despite confidence rising, the current level remains fairly soft and is below the average of the series (of +6 for both the monthly and quarterly surveys)."

Business confidence by industry. Business confidence generally improved across industries in October, with the exception of mining and recreation & personal services.

While still relatively optimistic, mining confidence has now declined over three consecutive months, which is consistent with the expectation that the weakened outlook for global growth will lower near-term demand for commodities.

In contrast, confidence picked up very sharply in construction - which appears to be related to a strengthened outlook for construction in Queensland - and wholesale. In levels terms, confidence was strongest in construction (+14), mining (+10) and retail (+7), and weakest (negative) in recreation & personal services (-2) and finance/ business/ property (-1).

Business confidence by state. Business confidence strengthened very solidly in NSW in October, while it was a little better in Victoria and Queensland. In contrast, confidence deteriorated heavily in Tasmania and also weakened in SA. Trend confidence levels remained strongest in WA and Queensland (the largest mining states), and were weakest in Tasmania and SA.

The variation in business conditions across sectors has become increasingly pronounced since late 2009.

Disparity between sector performance can be observed by comparing trend business conditions of the strongest performing sectors (mining, transport & utilities, recreation & personal services and finance/ business/ property) with trend conditions of the weakest performing sectors (retail, manufacturing, construction and wholesale).

The persistent divergence in industry conditions indicates that the Australian economy is undergoing a structural transformation towards mining and service-based industries, and away from traditional manufacturing and discretionary retailing.

Later today we get the latest Westpac/Melbourne Institute consumer confidence survey and housing finance data for September.