Confidence up while conditions deteriorate further: NAB September survey

Summary: Business conditions deteriorate in September; ANZ expects September to be “low point”; confidence up markedly; driven by large shifts in NSW, Victoria following reopening roadmap announcements, rising vaccination rates; economy shows considerable resilience, rebound expected; capacity utilisation rate declines again; four of eight sectors of economy below respective long-run averages.

NAB’s business survey indicated Australian business conditions were robust in the first half of 2018, with a cyclical-peak reached in April of that year. Readings from NAB’s index then began to slip, declining to below-average levels by the end of 2018. Forecasts of a slowdown in the domestic economy began to emerge in the first half of 2019 and the index trended lower, hitting a nadir in April 2020 as pandemic restrictions were introduced. Conditions improved markedly over the next twelve months, only to fall markedly in the middle of this year.

According to NAB’s latest monthly business survey of over 500 firms conducted over the last two weeks of September, business conditions have deteriorated. NAB’s conditions index registered 5, down from August’s reading of 14.

“While there has been some volatility over the past few months as different regions of the country move in and out of lockdowns and restrictions are eased and tightened, we expect this will be the low point, with New South Wales already progressing to its next stage of reopening,” said ANZ senior economist Catherine Birch.

In contrast, business confidence improved markedly. NAB’s confidence index rose from August’s revised reading of -6 to 13, back above the long-term average. Typically, NAB’s confidence index leads the conditions index by approximately one month, although some divergences have appeared in the past from time to time.

“The improvement was driven by large shifts in confidence in New South Wales and Victoria following the announcement of reopening roadmaps in these states as well as rising vaccination rates across the country,” said NAB senior economist Brody Viney.

Short-term Commonwealth Government bond yields increased noticeably on the day. By the end of it, the 3-year ACGB yield had added 6bps to 0.77% while 10-year and 20-year yields each slipped 1bp to 1.74% and 2.33% respectively.

In the cash futures market, expectations of a change in the actual cash rate, currently at 0.03%, remained largely unchanged. At the end of the day, contract prices implied the cash rate would rise to around 0.46% by February 2023.

“Overall, the economy has shown considerable resilience through the most recent round of lockdowns, supported by policy and adaptations learned through past lockdown experiences, but this resilience may be wearing thin,” said NAB’s Viney. He currently expects a “strong rebound” while noting the presence of uncertainties associated with future consumer behaviour and government policy settings.

NAB’s measure of national capacity utilisation indicated it had declined again, falling from August’s revised figure of 80.1% to 78.4%. Four of the eight sectors of the economy were reported to be operating below their respective long-run averages. The mining, manufacturing, transport/utilities and construction sectors were reported to be still operating at or above average levels.

Capacity utilisation is generally accepted as an indicator of future investment expenditure and it also has a strong inverse relationship with the unemployment rate.


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