Business conditions improve but confidence falls in NAB November survey

Summary: Business conditions improve in November; confidence deteriorates; conditions “well above” long-run average; strong recovery underway, economy “well placed” to carry momentum forward; capacity utilisation rate rises again; all eight sectors of economy at/above 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 back in the middle of this year.

According to NAB’s latest monthly business survey of over 450 firms conducted over the last week and a half of November, business conditions have improved slightly. NAB’s conditions index registered 12, up from October’s revised reading of 10.

In contrast, business confidence deteriorated. NAB’s confidence index fell from October’s revised reading of 20 to 12, a reading still 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.

“While this result was a little underwhelming, given further easing of restrictions, conditions were well above the long-run average of +5.8,” said ANZ senior economist Catherine Birch.

Commonwealth Government bond yields fell noticeably on the day, outgunning modest falls in US Treasury yields overnight. By the close of business, the 3-year ACGB yield had shed 5bps to 1.02%, the 10-year yield had lost 6bps to 1.55% while the 20-year yield finished 7 bps lower at 2.09%.

In the cash futures market, expectations of any material change in the actual cash rate, currently at 0.04%, remained fairly soft. At the end of the day, contract prices implied the cash rate would not exceed the RBA’s 0.10% target rate until May 2022 but then rise to 0.755% by December 2022 and to 1.255% by March 2023.

“Overall, these results indicate a strong recovery is underway…Notwithstanding the possibility of new disruptions related to the Omicron variant, the economy is well placed to carry this momentum forward over coming months and into 2022,” said NAB Chief Economist Alan Oster.

NAB’s measure of national capacity utilisation again increased noticeably, this time from October’s revised figure of 81.2% to 83.2%. All eight sectors of the economy were reported to be operating at or above their respective long-run averages.

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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