Second biggest fall in business confidence since the GFC

NAB Business survey

What happened? The NAB business confidence index fell by 18.5 points to a 12-month low of -7.9 points in July. It was the second biggest monthly decline in sentiment since October 2008 (after the record 61.8 point plunge in March 2020). And the conditions index dropped 13.5 points to a 9-month low of +11.4 points in July with the 13.5 point fall the third biggest decline since records began in March 1997 (after March and April 2020).

Investor implications: Larger ‘blue chip’ ASX-listed companies are unlikely to feel the same level of pain as smaller and medium size enterprises (SMEs), currently bearing the brunt of virus lockdowns. According to Bloomberg data, around 40 per cent of ASX-listed company profits are sourced overseas, insulating them from local shutdowns. Today, building materials company James Hardie posted record earnings for the first quarter on the back of the North American home building boom.

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

What does it mean?

• Aussie business confidence, as measured by the NAB, fell back into negative territory for the first time in 10 months to the lowest level since July 2020 due to widespread virus lockdowns and border closures. In fact, the 18.5 per cent decline in the gauge was the second biggest monthly fall since October 2008 (after the record 61.8 point plunge in March 2020).

• Sentiment fell across all states and territories in July, down the most in NSW due to Greater Sydney’s extended shutdown. But confidence was strongest in the mining boom state of Western Australia and modestly positive elsewhere except in Queensland. By industry, NAB economists reported that the services sector was hardest hit by government restrictions: “Transport & utilities, manufacturing and finance, business & property saw very large declines in the month.”

• The business conditions index dropped 13.5 points to a 9-month low of +11.4 points in July with the 13.5 point fall the third biggest decline since NAB records began in March 1997 (after March and April 2020). Key measures of business conditions, including trading (down 19.6 points), employment (down 7.4 points) and profitability (down 19.1 points) all plunged in July. These measures were all at record highs in May!

• Business conditions in July fell by the most in NSW and South Australia. But the three best performing economies – Tasmania, Queensland and Western Australia – recorded the strongest operating conditions. By industry, the conditions gauge fell most for transport and utilities (down 29 points) and recreational and personal services (down 25 points). Conditions in mining remain best, followed by the finance, business and property industry.

• The NAB survey was conducted from July 20-30, covering over 400 firms – mostly larger businesses – in the non-farm business sector. According to Bloomberg data, around 40 per cent of ASX-listed company profits are sourced overseas, insulating them from local shutdowns. Today, building materials company James Hardie posted record earnings for the first quarter on the back of the North American home building boom. And larger companies with national and global operations can pivot quickly to remote working, keeping their core operations going and their cash flowing while ‘big box’ retailers can switch to e-commerce and online channels.

• But it is the smaller and medium-sized enterprises (SMEs) that are likely bearing the brunt of government lockdowns. A separate survey of 400 SMEs by ACA Research and Fifth Quadrant conducted in mid-July shows that 56 per cent of SMEs reported a decline in revenue due to Covid-19 restrictions. And 57 per cent of SME decision makers are now “concerned” about their business survival, including 24 per cent who are “very concerned”.

• And the Chamber of Commerce and Industry Queensland (CCIQ) today released its June quarter pulse survey of business conditions. The CCIQ interviewed 1,042 Queensland businesses between July 7 and July 16. The CCIQ reported, “Declining profit levels and growing uncertainty in the June quarter 2021 have flowed through to a reduction in capital expenditure particularly as cash reserves have been depleted and business owners have had to reinject cash into the business,” with “More than 40 per cent of business owners have been forced to contribute personal funds to keep their business afloat, on average more than $110,000.”

• While business investment plans are likely to be put on hold by many companies, others are opportunistically using their strengthened balance sheets during the pandemic to merge or takeover rival companies. Already Bloomberg data show that over 5 per cent of the market capitalisation of S&P/ASX 200 listed companies are currently under pending or formally-announced mergers and acquisitions (M&A) since the beginning of the year. Investors should remain alert to potential takeovers and the implications for their portfolios.

• Encouragingly, JobSaver and Covid-19 payments are preserving jobs, combined with skills shortages due to international border closures. According to ACA Research and Fifth Quadrant, 32 per cent of SMEs had positions to fill in July with 51 per cent reporting that they are having difficulty finding skilled/qualified candidates. In the CCIQ survey, Queensland businesses reported that employment levels are expected to remain largely unchanged in the September quarter.

• As was the case last year with Victoria’s lengthy lockdown, a gradual bounce-back in economic activity can be expected in NSW once restrictions are eventually eased, supported by additional fiscal stimulus, elevated household savings, better job security, the ‘wealth effect’ from rising asset prices and higher vaccination rates. Of course, business hiring and investment intentions will remain critical to Australia’s near-term economic outlook.

What do you need to know?

National Australia Bank Business survey – July

• The NAB business confidence index fell from +10.6 points in June to -7.9 points in July (long-run average: +5.3 points). And business conditions index dropped from +24.9 points in June to +11.4 points in July (long-run average: +5.7 points).

• Key measures of business conditions all fell sharply in July, including trading conditions (down 19.6 points), employment (down 7.4 points) and profitability (down 19.1 points).

• The survey was conducted in the period July 20-30, 2021, covering over 400 firms, with NAB economists reporting, “Over this period, NSW remained locked down, SA underwent a short 7-day lockdown and Victoria had opened up – but saw a significant period of June in lockdown.”

• The proportion of firms reporting that they did not require credit rose from near 40 per cent to around 45 per cent.

• NAB economists noted: “Overall, the survey shows that the strength in the business sector seen in early-to-mid 2021 has faded on the back of fresh disruptions in the economy but it has not yet deteriorated to the lows seen in early 2020.”

Published by Ryan Felsman, Senior Economist, CommSec