Weakest business confidence in 20 monthsBusiness survey; Consumer confidence; China inflation
Business confidence falls: The business confidence index fell from an upwardly-revised +6.7 points (previously +6.2 points) in May to +5.7 points in June – the lowest level in 20 months. The long-term average is +6.0 points.
Business conditions elevated: The NAB business conditions index rose from a downwardly revised +14.0 points (previously +15.1 points) in May to +15.0 points in June. The long term average is +5.7 points.
Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.2 per cent to120.1, above the average of 114.0 since 2014 and average of 113.0 since 1990.
China consumer prices: Consumer prices rose by 1.9 per cent in the year to June (forecast 1.9 per cent), up from 1.8 per cent in May.
China business inflation: Producer prices rose by 4.7 per cent in the year to June (forecast 4.5 per cent), up from 4.1 per cent in the year to May. It was the strongest annual growth rate in six months.
What does it all mean?
Aussie business conditions remain elevated. The NAB identified an improvement in trading and profitability. And the business environment improved for the manufacturing, construction, wholesale and financial, and property and business services industries. Buoyant cash flows were particularly supportive of the transport and utilities, and recreational and personal industries. But retailers continue to experience headwinds from global competitors, including e-commerce companies, pressuring margins.
While conditions are strong, the same cannot be said for business confidence. Confidence has been shackled since the beginning of the year and is now the lowest since October 2016. Proposed company tax cuts have become a political football, perhaps dampening sentiment.
Surprisingly, business confidence in New South Wales and Victoria is lagging the resources-focused states of Western Australia and Queensland. The eastern states have assumed economic growth leadership on the back of strong population growth and record low interest rates following the end of the mining construction boom.
The miners are enjoying a lift in commodity prices (until recently), generating free cashflow, strengthening balance sheets and creating jobs. Around $4.7 billion worth of business spending on mining projects from Pilbara Minerals, Fortescue, BHP, Newcrest and Altura Mining are boosting confidence in the West. And Rio Tinto and Pembroke Resources have around $3 billion in bauxite and coal projects underway or planned in Queensland.
Consumer confidence ebbs and flows from week-to-week. Sentiment has edged lower over the past month, but consumers remain positive. Perhaps one reason for this is that goods prices remain low. As evidenced in last week’s May retail trade release, shoppers took advantage of winter sales, increasing spending on clothing, footwear and personal accessories at department stores. Frugal Aussies expect consumer prices to remain anchored with inflation expectations now the equal lowest since November 2016.
Business inflation is back in China, driven by rising energy costs. Annual producer prices rose for a third straight month to 6-month highs. Raw materials prices (oil and coal) surged by 8.8 per cent over the year to June, up from 7.4 per cent in May.
What do the figures show?
National Australia Bank Business Survey
The NAB business conditions index rose from a downwardly-revised +14.0 points (previously +15.1 points) in May to +15.0 points in June. The long-term average is +5.7 points.
The NAB business confidence index fell from an upwardly-revised +6.7 points (previously +6.2 points) in May to +5.7 points in June – the lowest level in 20 months. The long term average is +6.0 points.
The survey was undertaken from June 25 to 29.
The rolling annual average business conditions index increased to a record-high +17.27 points in June, up from +17.26 points in May.
Components: the index of trading conditions rose from +19.9 points to +22.6 points; employment fell from +8.6 points to +4.9 points; profitability rose from +12.4 points to +16.7 points; forward orders fell from +4.0 points to +2.5 points.
Inflationary indicators: The monthly reading of labour costs rose at a 0.8 per cent quarterly rate in June after a 1.0 per cent rise in May. Purchase costs rose at a 0.7 per cent quarterly rate in June after a 0.9 per cent rise in May. Final product prices rose by 0.4 per cent in June after increasing by 0.5 per cent quarterly rate in May. Retail prices were flat in June after a 0.2 per cent rise in May.
Capacity utilisation rose to 82.4 per cent in June from 82.0 per cent in May, above the long-term average of 81.1.
The proportion of firms reporting that they did not require credit rose to 82 per cent in June, up from 52 per cent in May.
The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.2 per cent to 120.1, above the average of 114.0 since 2014 and average of 113.0 since 1990.
Three of the components of the index increased last week:
The estimate of family finances compared with a year ago was down from to 109.7 to 106.7;
The estimate of family finances over the next year was up from 124.2 to 126.1;
Economic conditions over the next 12 months was up from 108.8 to 111.7;
Economic conditions over the next 5 years was up from 114.1 to 115.9
The measure of whether it was a good time to buy a major household item was down from 145.1 to 139.9.
The measure of inflation expectations fell from 4.5 per cent to 4.0 per cent – the equal lowest reading in around 1½ years. China Inflation
Consumer prices rose by 1.9 per cent in the year to June (forecast 1.9 per cent), up from 1.8 per cent in May.
Consumer prices fell by 0.1 per cent in June after falling by 0.2 per cent in May. Food prices fell by 0.8 per cent in June to stand 0.3 per cent higher than a year ago. Non-food prices rose 0.1 per cent to stand 2.2 per cent higher than a year ago.
Over the year, food, tobacco and alcohol prices rose by 0.8 per cent; health care prices rose 5.0 per cent; transportation and communication price rose 2.4 per cent; residential property prices were up 2.3 per cent; education, culture and entertainment prices increased by 1.8 per cent; daily necessities and services prices were up 1.5 per cent; clothing prices rose by 1.1 per cent; and other supplies and services increased by 0.9 per cent.
Producer prices rose by 4.7 per cent in the year to June (forecast 4.5 per cent), up from 4.1 per cent in the year to May. It was the strongest annual growth rate in six months.
Over the year, the prices of raw materials were up by 8.8 per cent with the cost of processing up 4.6 per cent. The means of production were up 6.1 per cent with extraction costs up 11.5 per cent.
What is the importance of the economic data?
The monthly National Australia Bank business survey is valuable in providing a timely reading about the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.
The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.
China’s National Bureau of Statistics releases its monthly economic statistics around mid-month. Quarterly GDP data is released around the 19th of January, April, July and October. China’s Customs Office releases trade data, and the People’s Bank of China releases financial statistics, around the 10th of each month. China is Australia’s largest trading partner and changes in the Chinese economy have major implications for the Aussie economy.
What are the implications for interest rates and investors?
There is no need for alarm following today’s business survey release, despite a further weakening in confidence. Australia’s businesses are largely in good health with trading and profitability conditions at elevated levels. The drag from the end of the mining construction boom is receding. Jobs are being created, though the weakening in today’s employment sub-index will need to be monitored. Business inflation remains muted.
Consumer confidence has eased, but remains above long-term average levels. More broadly, aggressive global competition remains significant, keeping goods prices in check. The outlook for household consumption remains a wildcard for the domestic economic outlook.
Higher petrol prices, falling home prices, elevated mortgage debt, modest wages growth and the weaker Aussie dollar are negatives for household consumption. And much has been written about tightening lending standards. On the flip side, tax cuts should provide a modest income boost to some households and the job market remains firm. And the Aussie sharemarket is currently straddling 10½-year highs – a key positive for the wealth effect.
China’s business inflation is at 6-month highs, driven by rising energy prices. The eventual impact of US tariffs on input costs, manufactured goods prices, food prices and corporate profits will be keenly observed in the coming months.
CommSec expects official interest rates to be stable until early 2019.
Published by Ryan Felsman, Senior Economist, CommSec
Weakest business confidence in 20 monthsBusiness survey; Consumer confidence; China inflation