Interest rate cuts coming soon as conditions deteriorate sharply

The NAB survey of business conditions in April painted a gloomy picture of the economy.

Reserve Bank officials are nervously watching employment conditions with regard to potentially the first interest rate cut since August 2016. Picture: AFP

Business conditions deteriorated sharply in April, reversing all the gains for March, with a sharp fall in hiring intentions adding to the case for the Reserve Bank to cut interest rates as early as next month.

The NAB survey showed business conditions fell four points to +3 in April, below the average, with declines in all of the components and turnaround regarded as unlikely in the near term.

Confidence and forward orders were also below average, while the index recorded a sharp decline in employment conditions to a below-average read for the first time since late 2016.

“The bounce in conditions in March was short-lived, as we ­expected, given the weakness in forward-looking indicators,” National Australia Bank chief economist Alan Oster said.

“While trading and profitability have previously dipped below average, this is the first time the employment index has shown signs of weakness.

“While employment previously held up better — similar to official data — the impact of ­slowing activity and a weak outlook may now be flowing through to the labour market.”

The weakness comes as the RBA nervously watches for any hint of weakness in job creation, which could mean a cut in interest rates for the first time since August 2016. Westpac analyst Andrew Hanlan said the bank expected jobs growth and investment to diminish in response to slower economic growth and the loss of business confidence.

How business conditions have fallen

Mr Hanlan called the survey results “particularly weak”, saying the drop was further evidence of the continued economic slowdown, which began to emerge in mid-2018. “The trend is clear: the economy has slowed and slowed substantially, with the downturn broadening across industries,” he said.

“The downturn was led by the housing sector and the consumer, constrained by weak wages growth and high debt levels.”

The RBA last week said it now needed to see unemployment falling if interest rate cuts were to be avoided.

The NAB survey is a key element of the central bank’s assessment of the economy.

JPMorgan analysts said the drop in NAB’s employment index was significant, given the Reserve Bank had tethered the cash rate outlook to the labour market.

“In the survey details, the orders-to-inventories differential stayed steady, but at a level that still is suggestive of an easing bias from the RBA,” JPMorgan analysts said.

The NAB’s forward-looking indicators suggested ongoing weakness in business conditions, with forward orders negative and below average.

Meanwhile, capacity utilisation ticked up, but was only around the average, and sat well below the levels seen at the end of last year.

“The forward-looking indicators of the survey continue to ­suggest that the weakening in conditions over the second part of 2018 is unlikely to be reversed any time soon,” NAB’s Mr Oster said.

“Conditions are still positive but below average, suggesting a loss in momentum, but for now the private sector continues to grow moderately.”

The employment index fell to -1.

Confidence edged up one point to 0, but remaining well below average.

“We will be watching future readings of the employment index to assess if this is a sustained signal — the index at these levels, based on historical relationships, suggests employment growth of 14,000 jobs per month,” Mr Oster said.

This is a slowing from the rates seen through the second half of 2018 and early 2019.”

Additional reporting: Dow Jones Newswires