National Australia Bank has released its Monthly Business Survey for March. The bank found that business conditions had reversed the downward trajectory in March. Unfortunately, most improvements occurred in sectors that were already outperforming. Non-mining investments continue to be less than ideal. The business conditions index was up 6 points, which was 2 points above the Monthly Survey average. The economy appears to be stabilizing, although at soft levels. Lower interest rates have had a positive affected on sensitive sectors of the economy, such as investor housing. However, the affect on the economy at large has been relatively limited.
Confidence was lifted in the previous month from the RBA interest rate cut. Confidence in the mining sector rose significantly, despite the challenges to the industry. However, the positive impact of the RBA interest rate cut has most likely subsided. The NAB is concerned that the central bank is in an awkward position. An interest rate cut is need and its implementation is likely. However, trouble in the housing market will likely be exacerbated by an interest rate cut. Speculation and anxiety over a potential interest rate cut has had a negative impact on business confidence. Cost of living concerns are also inhibiting business confidence. Retail confidence has deteriorated and is now at its lowest levels since mid-2013.
Forward indicators were generally subdued, inline with previously months. Demand is showing only a modest improvement in the near term. Orders in mining increased, but were subdued due to sluggish Chinese demand. The lift in wholesale was surprising to the NAB but could be explained by the connection to the strong construction sector. The positive lifts in forward indicators were held down by negative results from transport and utilities orders as well as a decline in manufacturing, retail and professional services. Despite the decrease in orders, there was an increase in trading conditions that coincided with a modest increase in capacity utilization. Once again, an increase in capital expenditures contradicted the 2014Q4 ABS Capex Survey, which showed a contraction in non-mining investments.
Global growth is still inline with previous sub-trend projections. Monetary policies have boosted the struggling Japan and Eurozone regions. However, US data has been disappointing. NAB’s new US GDP forecast has now been pegged at 2.7 per cent. Moreover, emerging markets in Asia, including China, are continuing to decline and are not expected to improve in the near term. Forecasts for Australia have been fine-tuned but remain generally unchanged. The economy of Australia is still struggling to increase domestic demand while mining investments continue to fall. The NAB is worried that the hit from falling commodity prices will be larger than previously imagined. The fall in the AUD will benefit weak commodity prices, but will not solve the issue entirely. Domestic forecasts expect GDP to rise 2.3 per cent in 2014/15 and 3 per cent in 2015/16. An additional interest rate cut is expected in May.
Author: Simon Herrmann
Apr 14, 2015
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.