NAB July business survey continues to show steady recovery in non-mining activity

The NAB Business Survey for the month of July provided a relatively consistent message on the health of the Australian economy, notes the Economics Team at NAB.

Business confidence came at 4 in July vs 6 in June, while business conditions saw a decline to 8 in July vs 12 in June.

Summary

For a while now, the NAB Business Survey has provided a relatively consistent message on the health of the Australian economy. It continues to show a steady recovery in non-mining activity, with the services sectors clearly leading the way.

But while the Survey points to a reasonably upbeat outlook for the near to medium-term, longer term risks are becoming increasingly apparent, particularly going into 2018 as resource exports start to level off and dwelling construction turns negative.

These headwinds may require additional policy action to support growth, especially if the RBA hopes to see inflation return to within its target band.

Both global and domestic disinflationary pressures are expected to keep CPI inflation below the target band for an extended period, while structural shifts in the economy and modest economic growth will leave the unemployment rate under pressure.

To stabilise the unemployment rate (at around 5½%) we expect the RBA will feel the need to provide further medium term support through two more 25bp cuts in May and August 2017 (to a new low of 1%). And thereafter raises the prospect of the RBA thinking about the use of non-conventional monetary policy measures.

View from Alan Oster, NAB’s Chief Economist

The resilience of business confidence appears to stem largely from the fact that firms are still experiencing very elevated levels of business conditions – noting that the Survey was also conducted prior to the RBA recent decision to cut the cash rate 25bps.

In response to the implications of the results, Mr Oster said, “although some of the headline measures from the Survey eased a little in the month, we continue to be encouraged by the results."

"The outcome is still suggesting that the near-term outlook for the non-mining economy is a good one, which is helping prop up demand for labour, albeit primarily in the major eastern states. Interestingly, the employment index has exhibited a better trend than official labour market statistics”.