Business confidence dips in July despite market lift

Business confidence and trading conditions eased last month as employment held firm, according to NAB.

NAB group chief economist Alan Oster.

Business confidence and trading conditions eased marginally last month despite markets powering ahead as the Brexit vote and the Federal Election retreated into the rear-view mirror.

The NAB Business Survey for July revealed a dip in the confidence index from +5 to +4 and an easing of the conditions index from +11 to +8, although the employment component retained the gains of the prior month.

The confidence reading remains below the long-term average of +6, while the conditions figure held ahead of the long-run average of +5.

“Although some of the headline measures from the survey eased a little in the month, we continue to be encouraged by the results,” NAB chief economist Alan Oster said.

“The outcome is still suggesting that the near-term outlook for the non-mining economy is a good one, which is helping prop up demand for labour, albeit primarily in the major eastern states. Interestingly, the employment index has exhibited a better trend than official labour market statistics.”

Mr Oster said there were clear discrepancies across sectors as mining, transport and wholesale companies all underperformed, while retail saw the greatest improvement.

“The contribution from major industries suggests a relatively mixed bag, with service sectors continuing to be the best performers,” Mr Oster said.

“Signs of a broadening recovery in recent months have again become more obscure following sharp deteriorations in transport and wholesale — although the recovery in retail conditions was encouraging.”

The bank said while the near-term forecast was rosy given the robust conditions and confidence readings, it is growing wary of the medium-term outlook.

“The longer term risks are becoming increasingly apparent, particularly going into 2018 as resource exports flatten and dwelling construction turns negative,” Mr Oster said.

“These headwinds will require additional policy action to support growth and lift inflation back within the RBA’s target band.”

The bank surprised market-watchers by suggesting the RBA may consider QE measures to stimulate the economy in the medium-term, while also slashing its rates forecast from 1.75 per cent to 1.5 per cent next year.