Business conditions hit record high

Consumer inflation expectations hit 13½-month high
NAB Business Survey; Consumer sentiment

What happened? The NAB business confidence index eased from a record high of +23.5 points in April to +19.8 points in May. But the conditions index rose from +31.9 points to a record high +37.2 points in May.

Implications: Provided costs are controlled, rising business revenues should be reflected in higher profits and jobs. And for listed companies, higher profits, margins and earnings could translate to higher share prices.

Other data of note: The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.6 per cent to 110.7 (long-run average since 1990 is 112.6). Consumer inflation expectations over the next two years rose from 3.9 per cent to a 13½-month high of 4 per cent last week.

The business survey has broad implications for investors and the economy. The consumer confidence data has implications for retailers, and other consumer-focussed businesses.

What does it mean?

• Aussie business conditions are the strongest on record with firms enjoying the best trading, profitability, forward orders and employment conditions since the NAB series began in March 1997. And business confidence remained elevated in May, just below April’s historic high. Note the survey took place between May 18 and 28, 2021, ahead of the commencement of Melbourne’s fourth lockdown. Sentiment continues to be supported by a sizeable monetary and fiscal stimulus, bolstering the balance sheets of both households and firms.

• NAB economists said that Australia’s economy “now appears to be entering a new period of growth after a very rapid rebound.” Encouragingly, the survey’s key measure of business investment (capex) hit a record +24 index points in May, signalling a continued pick up in private sector spending on machinery and equipment. The Federal Government’s recently extended the instant asset write-off scheme in the Budget, allowing businesses to claim deductions upfront, rather than through depreciation. The strongly performing construction, property and retail trade sectors reported the biggest lift in capex in May.

• Business conditions are best in mining states, Western Australia and Queensland, with conditions strongest in the finance and property and wholesale trade sectors. Confidence is highest in WA and the booming mining sector.

• Business inflation remained contained in the May NAB survey, but final product prices and labour costs picked up. Of course, purchasing manager surveys globally – including Australia – highlight the rising cost of raw materials and inputs more generally to the production process. The bout of inflation is seen to be temporary rather than longer-lasting due to pandemic-induced reductions of global production and supply disruptions, which are increasing seaborne freight costs. However it is still a situation worth watching – especially if there is a transmission of higher producer prices to consumer prices.

• Already Aussie consumers are becoming wary of rising cost of living pressures. The ANZ/Roy Morgan measure of consumer inflation expectations over the next two years rose from 3.9 per cent to a 13½-month high of 4 per cent last week. According to the Bureau of Statistics (ABS), Aussie food prices rose by just 0.4 per cent in the March quarter, but the United Nations (UN) gauge of global food prices climbed to a decade high in May as supply chains continue to be impacted by the pandemic. And East Coast Aussie petrol prices are back at pre-pandemic levels. As a result, Australian consumers may become more pessimistic about their financial prospects. That said, the impact of higher prices on discretionary spending will likely be offset by excess household savings as well as improving job prospects.

What do you need to know?

National Australia Bank Business Survey – May

• The NAB business confidence index eased from a record high of +23.5 points in April to +19.8 points in May. And business conditions index rose from 31.9 points in April to a record high +37.2 points in May. Long-term index averages are around 5.5 points. Key measures of conditions, including employment, profitability, trading and forward orders all hit record highs with capacity utilisation just below all-time highs at 85.1 per cent.

• The survey was conducted in the period May 18-28, 2021, covering over 500 firms, but largely before Melbourne’s latest virus lockdown which commenced on May 27, 2021.

• The proportion of firms reporting that they did not require credit fell from near 55 per cent to around 50 per cent.

• NAB economists noted: “Overall, this was another very strong read for the business sector – and forward indicators point to ongoing strength in the near-term. This is a pleasing result coming after last week’s national accounts which showed that the economy has now surpassed its pre-COVID level. The economy now appears to be entering a new period of growth after a very rapid rebound.”

Consumer sentiment – Week ended June 6

• The weekly ANZ-Roy Morgan consumer confidence rating fell by 0.6 per cent to 110.7 (long-run average since 1990 is 112.6).

Published by Ryan Felsman, Senior Economist, CommSec