NAB says rate cut had no impact on confidence in September

The last interest rate cut appears to have had little influence on business confidence in September, says NAB.

NAB’s chief economist Alan Oster.

The August interest rate cut appears to have had little impact on business confidence in September, with sentiment remaining steady.

NAB’s latest monthly business survey showed a continuation of recent trends as dominant service sectors such as home construction outperform, the resources sector wavers at the end of the mining boom and the retail industry shows signs of weakness.

The latter development bears close watching as we head into the crucial Christmas sales period, NAB said, with retailers struggling to regain momentum after a steady start to 2016 was interrupted in the second quarter.

Through the month, the business confidence index held steady at +6 points, while business conditions edged up one point to +8.

“There was no hint that the RBA’s interest rate cut in early August had any further material impact on confidence in September after seemingly providing some support in August, although the counterfactual is impossible to measure,” NAB chief economist Alan Oster said.

“Business confidence is in line with its long-run average and while we would like to see confidence at even higher levels as a precursor to stronger non-mining business investment, this is still a good outcome given numerous uncertainties facing business, especially from offshore.”

Mr Oster said continued above-average readings of business conditions pointed to a non-mining recovery that was “more entrenched”, but a sector-by-sector analysis suggested a patchwork economy.

“The strength in business conditions has once again become more heavily skewed towards major services industries after some promising signs of a broadbased recovery earlier in the year,” he said.

“We are also continuing to monitor negative trends in retail conditions, which deteriorated further in September — seemingly related to a jump in input costs.”

Employment conditions did not improve in line with business conditions, with the employment index sliding 4 points to +1.

Mr Oster said this was conducive to “adequate employment growth”, but solidifies the view labour market conditions have weakened since the strong end to 2015.

NAB has retained its view that two 25 basis point rate cuts will be required in the second half of 2017 to help counter muted price pressures and improve a soft growth outlook, as momentum from housing construction and commodity exports fades.

“Overall, while we are somewhat cautious about the narrowing of the industry base underlying business conditions, results from the survey remain reasonably consistent with our pre-existing views of the economy — as far as it relates to the near-term outlook,” Mr Oster said.

“It suggests a multi-speed economy, but one where most key non-mining sectors are performing well in the near-term.

“However, weakening retail conditions are a significant risk to our outlook, especially considering that consumption accounts for more than 50 per cent of Australian GDP.”