Divergent business confidence

The latest National Australia Bank Business (NAB) Survey shows while business conditions remain robust - rising from a reading of 14 in July to 15 in August (the highest level since January 2008) - confidence among businesses deteriorated significantly - down from 12 to five (the lowest reading in 13 months).

The details of the report showed a strong pick-up in the employment index (up four points) to 11 in August that points to "an annual job creation rate of about 270,000 (or 22,000 per month) in coming months, which is sufficient to see the unemployment rate push lower (all else unchanged)..." Forward orders increased from three to four last month driven by a large increase in manufacturing orders that was offset by a sharp decline in retail orders.

While trading and profitability dipped by one point each - to 18 and 15, respectively - they remained at very high levels.

These are all fine and dandy readings that point to further improvement in domestic economic activity, so why the deterioration in confidence? NAB chief economist, Alan Oster, explains: "escalating tensions with North Korea may have contributed to the move this month..." But this isn't consistent with the brief and relatively small decline in the Australian share market (whenever tensions flare) and more, the Australian dollar's appreciation.

Business responses to NAB's questions on the factors having the biggest impact on confidence were more informative.  "For those indicating a deterioration in confidence, demand, margins, government policy and costs (energy and wages) play a major role."

Firms are concerned with the outlook for "customer demand". And so they should be. The monthly growth in retail spending had been steadily slowing since April this year. It showed no growth in the month of July. The slower rate of growth in retail spending is hardly surprising given stagnant wages growth, high household indebtedness and weak consumer confidence.

The strong employment reported in the NAB survey is a positive for consumer spending going forward. So is the pick-up in labour costs (wages).

But this is crimping business margins. The survey showed retail prices declined by 0.1% in the three-months to August, suggesting that businesses aren't able to on higher labour and purchase costs onto the consumer.

But as NAB pointed out, "firms indicating a deterioration in confidence place more concern on energy costs over wage costs at present".

As they should. For instance, a report from mozo.com.au reports that as at 1 July, electricity prices in New South Wales jumped between 11.8% and 34.5% (depending on the energy provider).

The increase in electricity prices would divert any rise in wages (if any) away from household spending while at the same time raising operating costs among businesses, reducing their margins and by extension, investment in plant & equipment and on staffing.

This will continue to gnaw at business confidence until the Federal government comes up with a clear, consistent and credible energy policy.

Read more: NABAlan OsterFederal GovernmentForward ordersNational Australia Bank Business SurveyNew South WalesNorth Korea
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