Confidence: the business/household divide

Yesterday's NAB Monthly Business Survey report confirmed that the first quarter slowdown in Australia's economic growth (to 1.7% from 2.4% in the December quarter) was anything but transitory.

Although the business conditions index dipped by one point to a reading of +12 in May from +13 in the previous month, it remains well above its long-run average of +5. As NAB put it: "The strength looks to be quite broad-based, with all industries recording positive business conditions for only the second time since 2010..."

However, the news is not so good in terms of business confidence with the index dropping six points to reading of +7 in May from +13 in April - a 46.3% drop in percentage terms - "suggesting that there are some peripheral factors still weighing on firms' perceptions of the operating environment."

But have no fear, the May business confidence reading remains above its long-run average of +6 and as history shows, continued buoyant business conditions spark a catch-up in business confidence as exemplified by the 91.2% surge in confidence in the month of April or the 46.4% lift back in January this year.

What is more, the three-month moving average shows business confidence steadily rising from a reading of +6 in the December quarter to +8 in the March quarter and +10 in April and May (two-month average). The business confidence index needs to drop to a reading of +3 (or 57.7%) next month to halt the upward trend in optimism.

While not impossible, this is highly unlikely given the positive forward indications - "Other leading indicators were generally encouraging, with the capacity utilisation rate rising, despite some pull-back in capital expenditure, while forward orders were steady in positive territory for the month."

Still, the latest survey found the business/consumer divide remains in play.

"Solid outcomes from the NAB Monthly Business Survey signal a divergence in conditions between the business and household sectors of the economy. How the disparity resolves itself will be critical to the outlook for growth. Optimists might point to solid levels of employment conditions as providing the much needed catalyst to lift the household sector out of its current funk. However, significant structural headwinds still pose a hurdle that will prove difficult to overcome, keeping wages growth subdued and consumers cautious with their spending."

Here, the lead from the Westpac-Melbourne Institute consumer sentiment survey is not encouraging. Australian consumer sentiment fell by 1.2 points to a reading of 96.2 in June from 98.0 in the previous month, marking the third straight month of sequential declines and the seventh straight month that pessimistic consumers outnumbered optimists (below 100).

How long could business conditions and confidence hold up in the face of weakening consumer confidence and, by extension, consumer spending?

The pessimistic view is that sluggish pay increases (and negative real wage growth) and employment gains largely concentrated in part time jobs would keep a lid on consumer spending, decreased company sales, lower corporate profits and decrease business investment in equipment and structures and staff.

But the continued buoyancy in business conditions and confidence also offers a positive outlook. Better business conditions and confident businesses provide a rosy underpinning for increased pay and employment and ultimately, increased consumer spending.

Read more: NABAustraliaBusiness SurveyWestpac-Melbourne Institute
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