Business conditions in Australia remain cool says Nab's monthly business survey. Despite the Reserve Bank of Australia’s 25 basis point cut to interest rates, confidence in Australian industries have deteriorated, with the exception of manufacturing and wholesale. Mining, due to the commodity price cycle, and retail have the largest decline in confidence. The business confidence index is now at its lowest levels since before the 2013 Federal election, dropping 3 points to 0 index points. However, business conditions were generally unchanged in February. Trading, profit and employment are all holding steady in general. Manufacturing and construction had the most significant improvements, with mining having an expected sharp decline. In addition, the AUD has made an unfavorable move in its valuation.
Although business conditions have stabilized marginally since Q4 2014, the trend continues downward. Conditions are stabilizing at low levels, with the business condition index remaining at +2, which is 2 points below the Monthly Survey average. There have been minor improvements to business credit, hinting that the interest rate cut may have had some impact. However, the ABS Private Capital Expenditure Survey underlined the weak and disappointing investment intentions of non-mining companies in 2015/16. The only industries with a positive and strong upward move in business conditions were construction and manufacturing, both raising 13 index points in February. Construction more than recovered from the decline in the previous month, with both apartment and housing approvals looking strong. Although manufacturing improved, it still remains contractionary, in line with AIG Manufacturing PMI for February.
The forward indicator indexes were rather polar. For forward orders, transport and utilities made major gains, up 19 index points. Construction was also up 15 points while manufacturing was only up 8 points. Meanwhile, mining was down 24 points while wholesale orders were down 6 points. In trend terms, transport and utilities were down 8 points. Mining was unsurprisingly down 16 points. Although capacity utilization improved noticeably from the decline of the previous month, utilization rates are below their long run average across most industries. Mining has the lowest relative capacity utilization rates. Recreation and personal services have seen the most improvement in capacity utilization. The capital expenditure index dropped marginally while the trend index remained the same. This is contradictory to the recent ABS Capex Survey of 2014Q4 which showed a contraction in non-mining investment plans for 2015/16.
NAB is unconvinced that global growth will tick up from 3% to 3.5% by the end of the year due to low oil prices and slow global trading. Although low oil and other commodity prices benefit some advanced economies, these same factors will hurt exporting countries to a comparable extent. Although the export oriented East Asian market is showing signs of slowing, the potential recovery in Europe combined with a lower Euro may offset this decline. NAB has not changed their near term domestic GDP forecast from 2.3% in 2014/15. The domestic economy is struggling due to a drop in mining investments and although there has been a boost to consumption, NAB believes that it is only a soft and temporary boost. They expect another interest rate cut in May due to a continual uptick in unemployment. In the longer term, NAB has seen commodity prices have a significant effect on income flow, they expect unemployment and consumer caution to rise and there is a sharp decline in mining investments. As such, NAB has lowered their 2015/16 GDP forecast from 3.2% to 3%.