Rate cut chance rises as confidence dives, private sector ‘stalls’

Business confidence dived to a 6½-year low before the bushfire crisis this month, according to NAB’s monthly business survey.

The impact of the bushfires makes another interest rate more likely Picture: AAP

Business confidence dived to a 6½-year low before the bushfire crisis this month, while conditions slipped and forward indicators stayed weak, according to NAB’s monthly business survey.

Confidence fell two points to a net balance of minus two in Dec­ember — the lowest since mid-2013. Conditions slip­ped one point to three. Both ­remain well below their long-run averages.

With business confidence likely to have taken a further hit as the bushfires turned into a national crisis this month, the data may support the chance of further rate cuts from the Reserve Bank.

The business survey also predates the coronavirus epidemic that emerged recently in China.

The market-implied chance of an RBA rate cut at its board meeting next Tuesday crept up to 29 per cent after the business survey data and a sell-off in global markets — including the Australian dollar and sharemarket — following a wor­sening of the coronavirus outbreak. That reversed a dive in rate cut probabilities last week following stronger-than-expected jobs data. December quarter CPI data is due on Wednesday.

NAB chief economist Alan Oster said the slight fall in business conditions was consistent with a stabilisation of business activity in the December quarter after a sizeable decline since mid-2018.

But while conditions may have bottomed, sustained weakness in confidence and forward-looking indicators from here would be a negative sign for the economy.

“At present there appears to be a relatively large divergence between confidence and conditions and we will continue to watch the survey to see how this resolves,” Mr Oster said. “If confidence and forward ­orders remain weak, it is likely that the early part of 2020 could see further deterioration in the growth momentum, especially in private-sector demand.

“We think that more policy stimulus will be needed to boost the economy over 2020.”

Overall, “conditions continued to imply a stalling in the private sector”, which pointed to another weak outcome for economic growth in the December quarter.

The fall in confidence “suggests firms themselves think conditions are unlikely to improve”.

Similarly, Mr Oster said, “forward-looking indicators suggest they are likely to remain weak”.

Trading conditions fell by one point to a net balance of five points and profitability fell two points to one point, while employment conditions stayed at an above-average four points.

Employment conditions were a “bright spot”, implying “reasonable ongoing employment demand”, with the services sectors accounting for a lot of the strength.

While the deterioration in conditions since mid-2018 has been broadbased, NSW and Victoria are now seeing the best conditions on the mainland, as are the service industries.

The retail remains weak due to a “moribund consumer” facing “cash flow difficulties”, while the services sector was healthier and manufacturing and construction were in the middle of the pack.

While there was no clear evidence bushfires hurt confidence last month, Mr Oster said “the more significant impact is likely to have occurred in January”.