While business confidence has been in the doldrums since the cash rate reached its (supposed) peak and discretionary spending has dropped, things are starting to look up for businesses.
According to the September edition of the NAB Monthly Business Survey – which talked to 350 firms between 23 and 30 September from the non-farm business sector – while confidence remains in negative territory and below average, both business confidence and conditions are rising once again.
Business conditions back to long-term levels
According to the September report (the most recent edition at the time of writing), business conditions rose 3 points to take it back to around the long-run average (+7 index points) in September.
In fact, all three subcomponents of business conditions (trading, profitability, and employment) all picked up in the month, with the employment index now back above average.
Conditions improved significantly in manufacturing (up 11 points), recreation and personal services (up 5 points), retail (up 5 points), and wholesale (up 4 points). Most other industries showed little change, except for mining, which experienced a sharp decline.
In trend terms, retail continues to face the most challenges and manufacturing is also in negative territory. Conversely, mining; transport and utilities; recreation and personal services; and finance, business, and property are performing the best.
The major bank said that, despite the easing trend in conditions over the past 24 months and “very weak forward orders” through 2024 (at -5 index points in September), capacity utilisation continues to track “well above average” at 83.1 per cent and reported capex also remains “healthy” at 8 index points in the month.
Moreover, despite economic growth increasingly at a snail’s pace, business activity has been resilient.
The outlook continues to look brighter, NAB said, particularly as price pressures are easing, with both survey-wide and retail sector price growth continuing to trend lower in the month.
However, input cost growth (including labour and purchase costs) remains higher than output price growth, suggesting that business margins are being pressured.
Confidence still needs some work, but the worst may be over
Despite business conditions improving, the sentiment among business owners is still pessimistic. While the confidence index rose by 3 points in September, NAB’s survey still showed that confidence remains in negative territory (at -2 index points) and is below average.
Confidence remains weakest in the goods distribution industries – retail and wholesale – albeit there having been an improvement in retail alongside recreation and personal services in the month.
Speaking of the findings from the September survey, NAB’s head of Australian economics Gareth Spence said: “Interestingly, as we think we are passing through the weakest point in economic growth for this cycle, business conditions have broadly tracked around average through mid-2024.
“While conditions have trended lower for around 24 months as growth has slowed, capacity utilisation remains well above its long-run average. “This remains an important dynamic for the RBA where, despite slow growth, inflation remains too high suggesting that the balance of supply and demand in the economy is yet to fully normalise.
“Overall, the business survey points to some encouraging signs as the RBA attempts to come in for a soft landing. While we would like to see the easing in price growth maintained over coming months, and for conditions to hold up even if just at around average levels, for now the trends remain encouraging.”
