NAB tweaks rates outlook as business conditions book modest rebound but momentum ebbs

NAB has raised the prospect of an RBA rate cut as it notes waning momentum despite a moderate rebound in conditions.

A customer shops at a supermarket in Brisbane. Picture: AAP

National Australia Bank has dumped its expectations of a rate rise next year as its survey of business conditions registered a moderate rebound in January after falling sharply in December.

NAB had pegged a rate rise in late 2020 but has today dialled its expectations back — forecasting a hold on rates over the forecast horizon.

In a note from chief economist Alan Oster, the bank warned the next move could well be down, “potentially as soon as H2 2019”.

“With inflation remaining weak and growth weaker than the RBA expected, the risk is that the Bank will act to bolster the economy should the labour market show any signs of deterioration or consumer spending weaken further,” NAB said.

It comes after the bank released its monthly read on business conditions, which showed a moderate rebound in January, but as it also noted the Australian economy has lost some momentum.

Conditions rose to 7 points last month from 3 points in December and confidence crept up to 4 points from 3 points in December, according to NAB’s Monthly Business Survey.

The Australian dollar edged 10 basis points higher on the release, rising from around US70.60 cents ahead of the 11.30am (AEDT) release to US70.70c at 11.45am (AEDT).

Business conditions — which measure trading, profitability and employment — fell in December by the most since the global financial crisis of 2008, hitting the lowest point since September 2014.

NAB chief economist Alan Oster said that while the rebound last month will partly ease concern about a potentially sharp downturn in the Australian economy, business conditions remain well down from recent highs and other aspects of the survey remain weak.

“We had noted that seasonality and statistical volatility may have driven some of the result but that the trend in conditions had been down,” he said.

“The January survey confirms this, and while we don’t think activity in the business sector has crashed, we think that there has been some loss in momentum”.

Looking ahead, Mr Oster said he expects business investment to still provide support to the economy over the next few years with a bit of extra support from infrastructure spill-overs and possibly even some new mining investment as the survey is consistent with ongoing growth in the sector.

“However, we remain cautious, and will be looking for the next reading to see whether there is any further deterioration,” he warned.

Retail business conditions remained weak, with conditions weakest for car sales and household goods, consistent with the broader macroeconomic picture.

Conditions remain strongest in the eastern mainland states — albeit there was no change in conditions in NSW and Victoria — with SA and WA lagging somewhat.

Confidence is generally higher in SA and WA suggesting the outlook is better than recent experience, while confidence is weakest in the east, with Victoria and NSW now “quite low”, Mr Oster said.

Forward looking indicators were mixed in the month as forward orders rose to be above average, after weakening last month, while capex and capacity utilisation declined in the month.

“The fall in capacity utilisation was large and is now only just above average levels — with most industries actually below average levels,” Mr Oster said.

“This may have implications for both future employment and capex plans.”