Business conditions bounce, but companies still urging caution

Business conditions have bounced with companies reporting improved sales, profits and hiring.

NAB group chief economist Alan Oster in Hobart for

Business conditions have bounced, with companies reporting improved sales, profits and hiring, easing concerns of a downturn.

The National Australia Bank’s monthly business survey shows the number of companies reporting improved conditions outnumbered those reporting a fall by seven percentage points in March, up from four percentage points in the previous month.

NAB chief economist Alan Oster said that while profits and sales were now in line with their long-term average, the number of companies reporting increased hiring was about four percentage points above average, which suggests the strong employment growth of the past year was set to continue.

“The increase in business conditions is a welcome development after the weakening trend over the past six months,” he said, while noting the survey still contained some worrying indicators.

A narrow majority of firms reported their forward orders had fallen, while the level of idle ­capacity has risen from 17.9 per cent last November to 19 per cent in the latest survey. The survey also indicates companies are becoming less committed to raising investment. In November, 15.8 per cent of firms were planning to lift investment, however the latest survey shows that has dropped to just 3.4 per cent.

Business investment will be a key variable in today’s federal budget, with Treasury expecting firm growth of 4 per cent this year and 5 per cent next when it last ­reviewed its budget forecasts in December.

Although companies are seeing better sales and profits, business is less confident about the outlook. The survey shows companies are equally divided about whether conditions will improve or deteriorate over coming months.

NAB estimates employment should continue rising by about 20,000 positions a month. ­Although this is below the levels of the first half of last year, it should be sufficient to keep the jobless rate at its 4.9 per cent level.

The Reserve Bank board, which meets today and is expected to keeps the cash rate at 1.5 per cent, will be reassured by these results. The RBA is puzzled over the split between strong performance of the labour market and relatively weak overall economic results.

Mr Oster said the survey still showed sectors of the economy remained weak, particularly retail and wholesale, which were affected by soft consumer spending, while the strongest industry was resources, which was benefiting from strong demand from China.

New Chinese business surveys are also encouraging about the outlook, showing that its manufacturing sector has pulled out of last year’s slump and is growing again, helped by government stimulus measures.

Matching business surveys elsewhere in Asia also showed a lift in business conditions, although a majority of firms in both Japan and South Korea is still contracting.