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Record monthly lift in business confidence
Job advertisements lift
NAB business survey; Job advertisements

Business confidence: The NAB business confidence index rose by a record 25.5 points to -20 points in May. (The long-term average is +5.2 points). Confidence had previously hit record lows of -65.2 in March.

Business conditions: The NAB business conditions index lifted to -23.8 points in May from an historic low of -33.7 points in April (The long-term average is +5.4 points).

Job advertisements: ANZ job advertisements rose by 0.5 per cent to 63,428 positions in May. But ads are still down by 59.8 per cent from a year ago following a record 53.4 per cent decline in April.

The business survey has broad implications for investors and the economy. 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?

• Aussie business confidence and conditions improved in May with government COVID-19 restrictions continuing to be lifted, enabling some businesses to re-open and increase trading hours. Trading conditions and profitability both lifted. Business sentiment rose by 25.5 points – the biggest monthly gain on record – after hitting historic lows of -65.2 points in March. But confidence remains near levels last seen in the Global Financial Crisis and the challenge ahead remains daunting for many business owners.

• Policy uncertainty over the longevity of the Federal Government’s fiscal initiatives – together with an inconsistency of policy approaches by state governments (such as, closure of borders) – are showing up in multiple business surveys as hindrances to activity and confidence. The removal of major fiscal supports by October – ‘JobKeeper’, $750 stimulus payments, the small and medium-sized enterprises (SME) loan guarantee scheme and business cash-flow support could potentially push many businesses off an ‘insolvency cliff’ forcing them to lay-off their employees.

· Another concern for businesses emerging from hibernation is weak consumer demand due to high unemployment, elevated mortgage debt and spending caution. Supply chains have also been disrupted, impacting the ability of firms to source materials and deliver goods, thus crimping selling prices.

• Most firms have adapted as best they can to the health crisis with the Bureau of Statistics (ABS) recently reporting that 70 per cent of Aussie businesses have changed the way they operate due to COVID-19 restrictions.

• The latest COVID-19 Weekly Business Sentiment Tracker from ACA Research and Fifth Quadrant (June 1) showed that 28 per cent of SMEs are very concerned about their chances of survival with revenues down by 30 per cent or more for 53 per cent of those surveyed. And the May NAB business survey highlighted, “on average the business sector reports an 11 per cent decline in revenue because of the pandemic.”

What do the reports and figures show?

National Australia Bank Business Survey – May

• The NAB business confidence index rose to -20 points in May from -45.5 points in April. (The long-term average is +5.2 points). And the business conditions index lifted to -23.8 points in May from -33.7 points in April (The long-term average is +5.4 points). The survey was conducted in the period May 19 – June 1, 2020 across 540 firms.

• The rolling annual average business confidence index fell from -9.2 points to -11.7 points. The rolling annual average business conditions index eased from -2.8 points to -5.1 points.

• Key Components: The index of trading conditions rose from -31.4 points to -18.3 points; employment lifted from –34.4 points to -30.7 points; profitability increased from -34.7 points to -19.5 points; forward orders rose from –35.5 points to -28.9 points; stocks lifted from -12.4 points to -10.4 points; exporter’s sales increased from -32.2 points to -37.1 points.

• Inflationary indicators show weak price and wage pressures: The monthly reading of labour costs fell at a 0.9 per cent quarterly rate in May after a 2.7 per cent fall in April. Purchase costs rose at a 0.3 per cent quarterly rate (previous month -0.2 per cent). Final product prices fell at a 0.3 per cent quarterly rate (previous month -0.5 per cent). Retail prices were flat (previous month +0.6 per cent quarterly rate).

• Capacity utilisation rose from 71.9 per cent to 74.5 per cent (81 per cent is the long-term average).

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

• NAB reported: “Business conditions saw a broad-based improvement in the month but remain deeply negative – at a level last seen coming out of the GFC. The services sectors remain weakest, but all sectors continue to see negative conditions. Business confidence increased further from its low point in March, but remains weak with a current reading last seen around the trough in the 1990s recession. The increase in confidence was also broad-based across the economy but all industries continue to expect a deterioration in conditions.”

• And, “Overall, this month’s results accord with what we have seen elsewhere, with restrictions having generally been eased – though to varying degrees across the states – there has seen some pickup in activity. However, uncertainty remains high both globally and domestically and businesses likely remain concerned about how quickly they will return to full capacity. Unsurprisingly the employment index – which appears to have stabilised – and capex remain very weak. Both indicators point to ongoing restraint in the business sector with respect to hiring and expansion plans. Indeed, while capacity utilisation saw some improvement, it remains historically low, and well below pre-COVID-19 levels. Forward orders, also near record lows, suggest activity will remain weak in the near term.”

• NAB also noted, “The largest impact [from COVID-19] has been on the recreational & personal services industry where almost 60 per cent of respondents have seen a major negative impact. Around a third of respondents in construction, retail, finance, business & property and transport & utilities have also seen a major impact.”

Job advertisements – May

• ANZ job advertisements rose by 0.5 per cent to 63,428 positions in May. But ads are still down by 59.8 per cent from a year ago following a record 53.4 per cent decline in April.

• ANZ said, “The unprecedented 58 per cent fall in ANZ Job Ads over March and April ended in May, with a 0.5 per cent month-on-month rise in the monthly average. The week-to-week movements are more promising, with job ads improving steadily during May, from a low point at the beginning of the month. This is consistent with the gradual rollback of COVID-19 restrictions, which has allowed some businesses to reopen, extend trading hours or increase activity and is seeing a recovery in household spending.”

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 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 investors?

• Virus restrictions are being wound back and confidence levels are improving. The economic recovery is underway. Aside from a second wave of virus infections, the biggest potential impediment to an economic rebound is the early removal of much-needed policy support. In fact, Reserve Bank Governor Philip Lowe recently said, “I’m hopeful that the fiscal support will be there for a long period of time.”

• The government’s stimulus package was designed to help businesses stay alive through a period of hibernation during the pandemic – enabling them to retain workers and pay creditors. Should that ‘Band Aid’ be ripped-off before businesses ‘get back on their feet’, this could spark a surge in bankruptcies and joblessness.

• As Dr. Lowe put it, it could cause more “scarring” in the labour market at a time when recent weekly and monthly data from the ANZ, ABS, SEEK and Indeed all point to a tentative bottoming in the labour market with job hiring intentions and wages lifting off low levels in April.

Published by Ryan Felsman, Senior Economist, CommSec