The Economy: Conditions Up, Confidence, Home Loans Down, More Of The Same

Business conditions improved a little in February, according to the latest monthly survey from the National Australia Bank, while business confidence fell.

Naturally, most reports concentrated on the negative, the fall in confidence, rather than the more substantive outcome in the survey, which was another month of reasonable conditions for business.

It was more of what we have been seeing since midway through 2011 and if anything the economy is drifting, but not slumping.

That was also a point underlined by another weak month in January for building approvals.

The Australian Bureau of Statistics yesterday reported a 1.2% fall in home loan approvals in January to a total of 47,768.

That was from a downwardly revised 48,370 in December.

The ABS said the total value of housing finance fell 2.3%, seasonally adjusted, to $20.732 billion.

In its survey commentary, the NAB said the improvement in business conditions (not large, but a rise nevertheless) was supported by a solid pick up in trading conditions and a slight rise in profitability, partly offset by a softening in employment conditions.

But there was a caveat, the NAB pointing out that while February's activity reading was slightly better, forward indicators of demand generally softened, "suggesting near-term activity may continue to drift".

"Credit demand picked up solidly in the month, following particularly weak outcomes in the previous two months.

"Overall, the survey is consistent with underlying demand growth of around 3½-3¾% and GDP (ex. coal) growth of around 3¼% in early 2012," the NAB said yesterday.

"Conditions improved significantly in wholesale and transport & utilities in February, unwinding heavy falls in the previous month, while they deteriorated modestly in retail and mining.

"By state, conditions strengthened markedly in WA, while Victoria was the only state to report deterioration in conditions.

"Labour and purchase costs growth picked up in February. Product price growth also strengthened, although overall price pressures appear to be fairly well contained," the NAB said.

The NAB said "Conditions also strengthened notably in recreation & personal services and manufacturing, while they weakened modestly in mining and retail.

"Overall, business conditions were strongest in transport & utilities (+24), recreation & personal services (+19) and mining (+17), while they were weakest (and contractionary) in retail (-14), manufacturing (-7) and construction (-6).

"The divergence in conditions in retail (-14) and wholesale (+5) is marked and somewhat surprising given the close connections between these sectors.

"Conditions rose sharply in WA in February, despite the softening in mining activity, while they were marginally better in Queensland and SA, unchanged in NSW and slightly weaker in Victoria.

"Conditions in Tasmania improved significantly (on a small sample), although remained very subdued overall.

"In levels terms, conditions in the mainland states were strongest in WA (+13), followed by NSW (+3), while they were softest in Victoria (zero), Queensland and SA (both +1). In trend terms, WA remained the strongest state."

It's hardly boom time stuff in the economy, but it's not sinking, as suggested by some of the media reaction to the fall in confidence.

However, the NAB says businesses appeared less confident about near-term activity in February than in January.

And, while overall confidence remained positive, uncertainty from the eurozone and financial markets, "the persistent strength in the Australian dollar and the decision by the RBA to keep rates on hold in February may have weighed on the confidence of some sectors", the bank said.

Business confidence eased in February, falling by 3 points to +1 index point, after strengthening gradually over recent months.

"While the fall was marginal and may just reflect month to month volatility, it is more likely that it reflects some degree of increased concern about the international economic environment and its potential impact on local business activity.

"In addition, the persistent strength in the Australian dollar continues to weigh on trade-based industries.

"Overall the index remains below the series long-run average (of +6 since 1989)," the NAB said.

And the outlook for interest rates?

Well the NAB suggests that The RBA may cut again (tentatively in May) if the exchange rate stays high and banks experience elevated funding costs.

"That is, tighter financial conditions not collapsing demand is the key.

"Weakness in the domestic economy in Q4 has continued into the early months of 2012. With business conditions tracking sideways and forward indicators from the NAB survey still weak, GDP growth (ex mining) is expected to be around 3.25% (6-month annualised) in Q1.

"Consumer spending remains subdued, and forward indicators for building and the labour market are flat.

"However, major minerals projects continue to place upside on engineering and infrastructure construction and commodity prices, although off their peaks, remain elevated. Our GDP forecasts have been lowered to 3.25% (from 3.75%) in 2012 but lifted marginally to 3.75% (from 3.5%) in 2013.

"Our inflation forecasts broadly unchanged with core (ex carbon tax) inflation at 2.2% over 2011/12, and 2.5% over 2012/13," the bank added.

The Westpac/Melbourne Institute consumer sentiment survey later today is likely to show a fall for February for the same reason as business confidence fell.