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Business confidence hits 6-year low

Annual business profits hit 5-year low; Job ads lift

NAB Business survey; Weekly consumer sentiment; Job advertisements

Business survey: The NAB business confidence index fell from +1.1 points in August to a 6-year low of -0.3 points in September. The long-term average is +5.9 points. But the business conditions index rose from +0.6 points in August to +1.6 points in September. The long-term average is +5.8 points.

Profit pressures: The 12-month moving average of the NAB profitability index fell to a 5-year low of +2.1 points in September, down from +3.5 points in August. The long-term average is +4.6 points.

Consumer confidence: The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.1 per cent to 112.3 points after lifting by 4.2 per cent – the most in 15 months – in the previous week. Sentiment is below the average of 114.4 points held since 2014 and the longer term average of 113.1 points since 1990.

Job advertisements: ANZ job advertisements rose by 0.3 per cent in September after falling by 2.6 per cent in August. Ads were down by 10.4 per cent over the year to 157,638.

The business survey has broad implications for investors and the economy. The consumer confidence figures have implications for retailers, and other consumer-focussed businesses. The job advertisements data is a leading indicator of the job market and therefore important for consumer-focussed stocks and companies such as SEEK.

What does it all mean?

• The latest Aussie business survey reflects weak private sector demand, consumer spending caution, tepid operating conditions, global trade policy uncertainty and cautious investment spending intentions.

• And despite interest rate cuts in June and July (the survey pre-dates last week’s rate cut), business confidence has fallen to 6-year lows and business conditions remain stuck near 5-year lows. That said, capacity utilisation remains around long-run levels, employment conditions are still above long-run average levels and mining investment is rebounding.

• Aussie firms’ continue to face mounting profit margin pressures as rising operating, purchase and labour costs weigh on constrained balance sheets. Rising global import duties are also contributing to lifting input costs. And prices received by companies for goods and services remain flat. In fact, the NAB profitability conditions index hit 5-year lows in 12-month moving average terms in September.

• Consumer confidence readings have been choppy of late. But last week’s reading was bang in-line with the average over the past six weeks (since the week ended September 1), despite falling below longer-term averages.

• Not helping sentiment was a reversal in the Aussie sharemarket last week. The S&P/ASX200 index lost 3 per cent – its worst week since November – dragged lower by global growth concerns following the release of disappointing US economic data. And the Aussie dollar fell to US66.71 cents against the greenback on October 2 – the lowest level since March 2009 – after the Reserve Bank cut interest rates to record lows. While a positive for exporters, consumers tend to be pessimistic about a weaker currency because it crimps purchasing power for overseas sourced goods and increases international travel costs.

What do the figures show?

National Australia Bank Business Survey

• The NAB business confidence index fell from +1.1 points in August to a 6-year low of -0.3 points in September. The long-term average is +5.9 points. But the business conditions index rose from +0.6 points in August to +1.6 points in September. The long-term average is +5.8 points.

• The survey was conducted in the period September 18-30 2019.

• The rolling annual average business confidence index fell from +3.2 points in August to +2.6 points in September, below the long-run average of +5.8 points.

• The rolling annual average business conditions index fell from +6.1 points in August to +5.1 points in September, below the long-run average of +6.0 points.

• Key Components: The index of trading conditions rose from +3.3 points to +3.8 points; employment rose from +1.7 points to +3.5 points; profitability rose from -2.8 points to -1.9 points; forward orders rose from -4.3 points to -2.5 points; stocks rose from +2.0 points to +2.2 points; exports rose from -0.2 points to +0.3 points.

• Inflationary indicators: The monthly reading of labour costs rose at a 0.9 per cent quarterly rate in September after a 1.1 per cent rise in August. Purchase costs rose at a 0.7 per cent quarterly rate (previously +0.6 per cent). Final product prices rose at a 0.1 per cent quarterly rate (previously +0.2 per cent). Retail prices were flat (previously +0.1 per cent).

• Capacity utilisation fell from 82.1 per cent to 81.9 per cent, above the long-term average of 81.1 per cent.

• The proportion of firms reporting that they did not require credit rose from 40 per cent to 55 per cent.

• NAB reported: “The results of the September survey suggest more of the same for the business sector. Conditions edged up, and confidence was marginally lower, but both remain below their long run average – well below the levels seen just over a year ago. This suggests that activity in the business sector has slowed and we fear the risk that this spreads to both investment and employment intentions”.

• “At present there are some key themes in the business sector. There is a downturn in housing construction and this has some way to play out. The consumer is weak, with low income growth and high debt levels having been a factor for some time. Global uncertainty is heightened on the back of trade ructions – and the exchange rate has depreciated. More positively, public sector spending has been a support to the business sector with a large pipeline of work underway.”

• “These factors have seen particular weakness in the ‘goods’ related part of the business survey with particular weakness in retail, wholesale, construction and manufacturing. Services sectors have generally held up better, and mining, while volatile recently, is also still a positive.”

• “Forward-looking indicators are mixed. Capacity utilisation fell slightly in the month, but remains above average. Forward orders edged higher but are below average.”

• “In combination with weak confidence, leading indicators generally suggest that conditions will remain around where they are going forward. To date, employment has mirrored the strength in the official labour market data, though the suggested pace of employment growth has slowed somewhat. Surveyed capex has declined further and is now below average – the quarterly survey for Q3 released next week will give us an indicator of firms’ intentions for investment in the period ahead.”

Consumer Sentiment

• The weekly ANZ-Roy Morgan consumer confidence rating fell by 2.1 per cent to 112.3 points after lifting by 4.2 per cent – the most in 15 months – in the previous week. Sentiment is below the average of 114.4 points held since 2014 and the longer term average of 113.1 points held since 1990.

• Four of the five major components of the index fell last week:

The estimate of family finances compared with a year ago was down from +14.9 points to +9.5 points;

The estimate of family finances over the next year was down from +29.1 points to +22.7 points;

Economic conditions over the next 12 months was down from -1.7 points to -3.4 points;

Economic conditions over the next 5 years was down from +7.0 points to +5.8 points;

The measure of whether it was a good time to buy a major household item was up from +24.3 points to +26.8 points.

• The measure of inflation expectations was steady at 4.1 per cent.

Job advertisements

• ANZ job advertisements rose by 0.3 per cent in September after falling by 2.6 per cent in August. Ads were down by 10.4 per cent over the year to 157,638.

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.

• The monthly Job Advertisements release is a leading employment indicator. Employers only seek additional staff if business activity is strong, and more importantly, if they expect that conditions will remain favourable in coming months. It takes around 5-6 months for the new staff to be added to the payrolls. But a fall in job advertisements would have a more immediate impact on monthly employment estimates.
What are the implications for interest rates and investors?

• In our view, the NAB report supports recent Reserve Bank moves to cut interest rates, while potentially increasing the likelihood of further cuts should non-mining business investment weaken further.

• Forward looking indicators of private sector investment appear more positive with the recent capital spending survey implying a lift in business investment intentions in 2019/20.

• Underneath the bonnet, key components of the September business survey showed some tentative signs of stabilisation with trading conditions, profitability, employment and forward orders all lifting a smidgen off still-low levels. And conditions in the retail sector and manufacturing sectors improved. That said, construction remains in the doldrums with residential building activity continuing to contract.

• The Westpac-Melbourne Institute’s October monthly consumer confidence index is due out tomorrow. The survey was conducted last week – the same as today’s released ANZ-Roy Morgan survey – so we’d expect an overlap in the current themes impacting consumer sentiment.

• Higher petrol prices, the weaker value of the Aussie dollar against the greenback and a loss of momentum in the ASX200 index (down 1.5 per cent so far in October) could more than offset improving sentiment towards the property market. And it appears that consumers are becoming increasingly concerned about economic conditions, given rising unemployment. That said, the positive ANZ job ads data for September was encouraging.

• If anything, the Reserve Bank’s move to cut interest rates to a record lows appears to have spooked consumers about the economic outlook. Sentiment fell after rates were cut in both June and July and falls in last week’s economic conditions sub-indexes point to a potentially similar outcome in October.

• The recent release of the Apple iPhone 11, however, may lift consumer spending in October, especially with additional tax offsets hitting bank accounts. And online sales events in November could be the catalyst for an increase in discretionary spending, especially if the rebound in property prices takes hold.

• Reserve Bank Governor Philip Lowe has opened the door for potential unconventional monetary policy next year. In a published article in the Financial Times, Dr. Lowe and Monetary Authority of Singapore deputy managing director Ms. Jacqueline Loh said that policies such as negative interest rates and central bank bond buying “may become increasingly important” in a world of structurally low real rates should conventional tools reach their limits.

• The Commonwealth Bank Group economists expect another rate cut in February 2020.

Published by  Ryan Felsman, Senior Economist, CommSec