Business confidence near 6½-year lows
Singapore gasoline prices hit 5½-month low
NAB Business survey; Petrol Prices

Business survey: The NAB business confidence index fell from a reading of zero in November to near 6½- year lows of -1.9 points in December. The long-term average is +5.8 points. And the business conditions index fell from +4.3 points in November to +2.7 points in December. The long-term average is +5.7 points.

Petrol prices: According to the Australian Institute of Petroleum, the national average price of unleaded petrol fell by 5.8 cents to 148.6 cents a litre last week. Pump prices fell the most in Brisbane (down 18.3 cents a litre), Sydney (down 14.5 c/l) and Melbourne (down 11.7 c/l) due to the retail discounting cycle. The business survey has broad implications for investors and the economy. The petrol figures have implications for retailers, especially petrol marketing groups.

What does it all mean?

Consumers and businesses remain wary about Australia’s economic prospects. In fact, weak confidence was a major contributor to Australia’s decade-low economic (GDP) growth rate in 2019. While business conditions appear to have stabilised, weak consumer demand, persistent profit margin pressures and a slowdown in residential home building continue to worry Aussie business owners. The ongoing East Coast drought, tragic bushfires and now the Novel coronavirus are additional concerns, weighing on sentiment.

But is it all bad news? Taxes have been cut, mortgage rates are at record lows, Aussie dollar weakness and rebounding property prices are all supportive of economic growth. And within the NAB business survey, job hiring conditions remain healthy. In fact, the still-solid reading of employment conditions in December implies jobs
growth of around 18,000 per month in the first half of 2020, keeping a lid on unemployment.

Motorists returning home after the Australia Day holiday weekend will be pleased to see that unleaded petrol prices are averaging around $1.40 a litre in major East Coast capital cities, according to MotorMouth. The retail discounting cycle commenced in mid-January with pump prices down by 22-32 cents a litre in Brisbane, Sydney and Melbourne over the past fortnight – good timing with many of us returning to work and school this week!

Wholesale (terminal gate) prices for unleaded petrol on mainland capital cities are broadly near $1.30 a litre, indicating that pump prices are nearing the bottom of the current discount cycle. In fact, unleaded petrol prices in Brisbane are expected to begin lifting on Saturday, while pump prices in Sydney will likely rise from Monday. The lift in Melbourne’s prices should follow by the middle of next week.

But the peak of the next East Coast petrol price cycle could be lower than recent highs. For example, in Adelaide unleaded petrol prices hit 165.50 cents a litre last week, below the previous cycle high of 172.70 cents a litre at the beginning of the year. And the Singapore benchmark gasoline price – the largest component of fuel prices paid by motorists – fell to 5½-month lows of US$69.45 a barrel last week. In Australian dollar terms, the Singapore gasoline price fell by $2.34 or 2.3 per cent to $101.43 a barrel or 63.79 cents a litre – a 3-month low. Crude oil prices fell by US$4-7 a barrel last week on investor concerns about the impact of coronavirus on travel demand and broader economic activity.

What do the figures show?

National Australia Bank Business Survey – December

The NAB business confidence index fell from a reading of zero in November to near 6½-year lows of -1.9 points in December. The long-term average is +5.8 points. And the business conditions index fell from +4.3 points in November to +2.7 points in December. The long-term average is +5.7 points.

The survey was conducted in the period January 2-17 2020.

The rolling annual average business confidence index fell from +2.1 points in November to 6-year lows of +1.6 points in December, below the long-run average of +5.8 points.

The rolling annual average business conditions index was unchanged at 4½-year lows of +3.9 points in December, below the long-run average of +6.0 points.

Key Components: The index of trading conditions fell from +6.4 points to +4.9 points; employment rose from +4.1 points to +4.2 points; profitability fell from +3.5 points to +1.0 point; forward orders rose from -2.3 points to -1.4 points; stocks fell from +3.1 points to -0.9 points; exports fell from +0.1 points to -0.7 points.

Inflationary indicators: The monthly reading of labour costs rose at a 0.8 per cent quarterly rate in December after a 0.8 per cent rise in November. Purchase costs rose at a 0.5 per cent quarterly rate (previously +0.7 per cent). Final product prices rose at a 0.3 per cent quarterly rate (previously +0.5 per cent). Retail prices rose at a 0.5 per cent quarterly rate (previously +0.5 per cent).

Capacity utilisation fell from 81.0 per cent to 80.9 per cent, below the long-term average of 81.1 per cent.

The proportion of firms reporting that they did not require credit was steady at 40 per cent.

NAB reported: “After showing initial signs over recent months, it now appears that business conditions have stabilised following their sizeable decline since mid-2018. The decline in conditions has been fairly broad-based across the states and is evident across industries”.

“The services industries continue to report the best conditions and remain well above the national average. At present NSW and Victoria report the best conditions across the mainland states.”

“That said, conditions continue to imply a stalling in the private sector and we think that the survey suggests that there was another weak outcome in the December quarter. For now, the survey has not showed clear evidence of a bushfire impact, but the more significant impact is likely to have occurred in January.”

“Forward-looking indicators were broadly unchanged in the month, and continue to suggest ongoing weakness in business conditions. Forward orders rose 1pt but remain
negative, while capacity utilisation remains around average. The fall in confidence suggests firms themselves think conditions are unlikely to improve going forward.”

“Conditions appear to have bottomed, but our forwardlooking indicators suggest they are likely to remain weak. A similar sectoral story continues to play out and will likely for some time, with retail remaining weak based on a moribund

consumer (in the face of cashflow difficulties) but healthier services sector growth given the ‘essential nature’ of many of these industries. Manufacturing and construction lie in the middle of pack.”

“The business survey has mirrored the weakening in private sector demand over the past year or so. Retail, wholesale and transport & utilities are currently very weak and reflect the moribund consumer sector with official data also showing the weakest outcomes there since the early 1990s. Also reflected in the survey are the trends in construction and manufacturing in the economy more broadly. So while public sector spending has been a key support to growth over the last year, we are not seeing as many spill-overs as hoped into private sector business confidence – it appears to be more affected by the weak consumer at present.”

Petrol prices

According to the Australian Institute of Petroleum, the national average price of unleaded petrol fell by 5.8 cents to 148.6 cents a litre last week. The metropolitan price fell by 9.3 cents to 149.0 cents a litre, but the regional price rose by 1.2 cents to 147.9 cents a litre.

Average unleaded petrol prices across states and territories over the past week were: Sydney (down 14.5 cents to 147.1 c/l), Melbourne (down by 11.7 cents to 151.4 c/l), Brisbane (down by 18.3 cents to 147.7 c/l), Adelaide (up by 19.0 cents to 160.4 c/l), Perth (down by 2.4 cents to 141.9 c/l), Darwin (down by 1.6 cents to 139.8 c/l), Canberra (down by 0.6 cents to 146.6 c/l) and Hobart (down by 0.1 cent to 155.7 c/l).

The smoothed gross retail margin (2-month rolling average) for unleaded petrol rose from 14.79 cents a litre to a 5-week high of 15.06 cents a litre (24-month average: 13.1 cents a litre).

The national average diesel petrol price fell by 0.4 cents to 150.2 cents a litre over the past week. The metropolitan price fell by 0.4 cents to 148.8 cents a litre and the regional price was down by 0.3 cents to 151.4 cents a litre.

Today, the national average wholesale (terminal gate) unleaded petrol price stands at 130.4 cents a litre, down 0.7 cents over the week. The terminal gate diesel price stands at 135.0 cents a litre, down by 0.8 cents over the past week.

MotorMouth records the following average retail prices for unleaded fuel in capital cities today: Sydney 137.6c; Melbourne 143.3c; Brisbane 139.4c; Adelaide 149.2c; Perth 145.9c; Canberra 146.5c; Darwin 139.2c; Hobart 155.6c.

The key Singapore gasoline price fell by US$2.10 or 2.9 per cent last week to 5½-month lows of US$69.45 a barrel. In Australian dollar terms, the Singapore gasoline price fell by $2.34 or 2.3 per cent to $101.43 a barrel or 63.79 cents a litre – a 3-month low.

What is the importance of the economic data?

Weekly figures on petrol prices are compiled by ORIMA Research on behalf of the Australian Institute of Petroleum (AIP). National average retail prices are calculated as the weighted average of each State/Territory’s metropolitan and non-metropolitan retail petrol prices, with the weights based on the number of registered petrol vehicles in each of these regions. AIP data for retail petrol prices is based on available market data supplied by MotorMouth.

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.

What are the implications for interest rates and investors?

Stimulus through combined tax relief, interest rate cuts ,infrastructure spending, lifting mining investment and a weaker Aussie dollar is expected to eventually boost
economic growth, but confidence remains the biggest behavioural hurdle in 2020.

Business sentiment is near 6½-year lows and consumer confidence is at 4-year lows. But the ‘wealth effect’ from January 28 2020 4 Economic Insights. Business confidence near 6½-year lows rising home prices and listed sharemarket assets could eventually support ‘animal spirits’ (i.e. consumer sentiment). A lower national jobless rate (near 4 per cent), however is required to boost wages, increase
consumer demand and in turn lift business spending.

An easing of fiscal policy – assisted by bushfire infrastructure rebuilding and public transport building projects is supportive of economic growth. But tax reform – potentially abolishing or lowering state payroll taxes – and reduced regulatory/administrative burden along with greater certainty around energy/climate change policy could potentially support Aussies businesses.

Over the December quarter 2019, petrol prices rose by 5.5 per cent. Higher crude oil prices will lift the quarterly inflation rate by around 0.14 percentage points in the quarter. The Consumer Price Index is released tomorrow, which could have implications for the Reserve Bank Board meeting on February 4.

Commonwealth Bank Group economists continue to expect another interest rate cut from the Reserve Bank in the coming months to support the economy.

Ryan Felsman, Senior Economist, CommSec