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Thursday 15

November, 2018 3:17 PM



Solid business sector

Solid business sector

The NAB business confidence index eased from +7.0 points in July to a 25-month low of +4.4 points in August.

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11.09.2018 04:30 PM

Solid business sector; Renovation slump
NAB Business survey; Lending finance; Consumer sentiment

Business confidence: The NAB business confidence index eased from +7.0 points in July to a 25-month low of +4.4 points in August. The long-term average is +6.0 points.

Business conditions: The NAB business conditions index rose from +12.6 points in July to a 4-month high of +15.2 points in August. The long-term average is +5.7 points.

Consumer sentiment: The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.3 per cent to 116.2, but was still comfortably above the longer term average of 113.0.

Lending finance: Total new lending commitments (housing, personal, commercial and lease finance) rose by 0.1 per cent in July to $70.5 billion. But commitments are down by 0.1 per cent on the year. 

What does it all mean?

Consumer confidence fell last week, but not enough to offset gains over the previous fortnight. A weaker Aussie dollar, higher petrol prices and increases in bank mortgage rates would largely explain the easing in sentiment. Consumer confidence is still above ‘normal’, supported by a strong economy.

Political uncertainty was probably largely responsible for the softening in business confidence last month. But businesses are not sitting on their hands – overall business conditions remain healthy. But workers are harder to find, labour costs are rising and so are price pressures. Capacity use is not far off the best levels seen in a decade.

Have Aussies lost the desire to renovate? Maybe. Loans taken out for alterations and additions of homes have hit 17-year lows in trend terms. But a significant proportion of home borrowers are well ahead in their prepayments. One third of owner-occupier mortgages have at least two years of repayment buffers. So rather than taking out a new loan for the renovation, maybe some borrowers are using some of the extra borrowing capacity in their existing home loan to fund renovations.

Businesses are showing plenty of interest to build. Construction loans taken out by businesses stand at a record $28 billion. It is clear that rising migration, strong
job markets and healthy home building are causing knockon demand for shops and social infrastructure. 

What do the figures show?
National Australia Bank Business Survey

The business confidence index eased from +7.0 points in July to a 25-month low of +4.4 points in August. The long-term average is +6.0 points.

The business conditions index rose from +12.6 points in July to a 4-month high of+15.2 points in August. The long-term average is +5.7 points.

The survey was undertaken from August 24 to 31.

The rolling annual average business conditions index was broadly unchanged at +17.1 points, down from the record high of +17.3 points in June.

Components: the index of trading conditions rose from +17.8 points to +19.1 points; employment rose from +9.5 points to +10.4 points; profitability rose from +10.4 points to +15.7 points; forward orders rose from +1.7 points to +4.8 points.

Inflationary indicators: The monthly reading of labour costs rose at a 1.3 per cent quarterly rate in August after a 0.9 per cent rise in July. Purchase costs rose at a 1.0 per cent quarterly rate in August after a 0.9 per cent rise in July. Final product prices rose at a 0.5 per cent quarterly rate in August after increasing by 0.6 per cent quarterly rate in July. Retail prices rose at a 0.9 per cent quarterly rate in August after a 0.5 per cent rise in July.

Capacity utilisation rose from 82.2 per cent to 82.3 per cent in August and remains well above the long-term average of 81.1.

The proportion of firms reporting that they did not require credit eased from 70 per cent in July to 58 per cent in August.

NAB reported: “Conditions rose in mining, manufacturing, finance, business & property and retail. Conditions deteriorated in construction, wholesale and personal & recreation services, while they edged slightly lower in transport & utilities. In trend terms, conditions remain highest in mining, finance, business & property services and construction. As has been the case for some time, retail is the weakest, being the only industry to record negative conditions.”

Best conditions across regions: “Conditions (in trend terms) remain most favourable in Tasmania (+21pts), Queensland (+18pts) and Victoria (+15pts). Conditions in South Australia are now the lowest across states, though they too remain above average at +8pts.”

Consumer Sentiment

The weekly ANZ-Roy Morgan consumer confidence rating fell by 1.3 per cent to 116.2 after lifting 3.1 per cent in the previous fortnight. The index is still above the average of 114.1 held since 2014 and above the longer term average of 113.0 held since 1990.

Two of the five components of the index increased last week:

• The estimate of family finances compared with a year ago was down from 109.2 to 104.0;

• The estimate of family finances over the next year was up from 123.6 to 126.2;

• Economic conditions over the next 12 months was up from 107.1 to 109.3;

• Economic conditions over the next 5 years was down from 115.5 to 111.5;

• The measure of whether it was a good time to buy a major household item was down from 133.1 to 130.1.

The measure of inflation expectations fell from 4.4 per cent to 4.1 per cent.

Lending Finance

Total new lending commitments (housing, personal, commercial and lease finance) rose by 0.1 per cent in July to $70.5 billion. But commitments are down by 0.1 per cent on the year. In trend terms, lending rose for the second month, up by 0.4 per cent.

All housing finance rose by 1.2 per cent in June with construction and purchases also up 1.2 per cent while alterations and additions fell by 2.1 per cent.

Alterations and additions were down by 15.6 per cent over the year. All housing finance is up 0.8 per cent over the year with construction & purchase up 1.1 per cent.

Personal finance commitments fell by 4.8 per cent in July with revolving commitments down 11 per cent and fixed loans down 1.7 per cent. Personal finance is down 6.4 per cent on the year.

Commercial finance rose by 0.2 per cent in July with fixed lending up 0.2 per cent and revolving credit up 0.1 per cent. Commercial loans are up 0.1 per cent on a year ago.

Commercial loans for the purpose of construction equalled record highs of $28.6 billion in the year to July.

Lease finance rose by 1.9 per cent to stand 17.1 per cent higher over the year.

What is the importance of the economic data?

The ANZ/Roy Morgan weekly survey of consumer confidence closely tracks the monthly Westpac/Melbourne Institute consumer sentiment index but the former measure is a timelier assessment of consumer attitudes and is now closely tracked by the Reserve Bank.

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.

Lending Finance is released monthly by the Bureau of Statistics and contains figures on new housing, personal, commercial and lease finance commitments. The importance of the data lies in what it reveals about the appropriateness of interest rate settings, confidence and spending levels in the economy.

What are the implications for interest rates and investors?

The NAB business survey has to be watched carefully as it is a key monthly reading on economic activity and price pressures that could determine the timing of a rate hike.

The lending finance data is useful in highlighting future activity in a raft of areas including construction and consumer and business spending.

Loans to buy new cars peaked around the same time that growth of home prices peaked. The car market is worth tracking closely.

Financial institutions continue to closely assess conditions in retailing with new lending over the past year at the lowest levels in five years. Strong global competition is making for challenging conditions in retailing.

Published by Craig James, Chief Economist, CommSec
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