Good for now worrying for later

"The February NAB Monthly Business Survey gave back the surprisingly strong gains seen in the previous month..."

This was the opening line of the NAB report on business confidence and business conditions for February. How much were given back? Business confidence dropped 3 points to a reading of 7 last month after rising by 4 points to a reading of 10 in January. Business conditions dove 7 points (to 9) in February following a 6 point jump (to 16) the month before.

To fully appreciate the"give back", this translates to a drop of 29% and 43% in confidence and conditions, respectively.

But before the Johnny Littles start crying "the sky is falling", note NAB's first line. It was after the "surprisingly strong gains seen in the previous month". How strong? In percentage terms, both confidence and conditions surged by 59% in January.

Continuing NAB's first sentence, "...both conditions and confidence remain at above average levels". The long run average level for business confidence is 6, for conditions 5, "consistent with solid business activity in the near-term, and are higher than through much of H2 2016".

No Virginia, the sky is not falling. More so because the February "give back" didn't come as a surprise either.

NAB chief economist Alan Oster warned about this when the NAB Business Survey for January was released last month. "a degree of caution should still be exercised given the diverse and rapidly changing seasonal influences at this time of year (which potentially includes the shift in Chinese New Year to January this year)". Good on you Alan.

For a better picture - and to smooth out the monthly volatility in the indices - the three-month moving average shows business confidence lifted to a reading of 8 in February - the highest since August 2014 -- (from 7 in the previous month) while conditions rose to a reading of 12 - the highest in seven months - (from 11 in January).

Oster's take on the current survey results:

"Business conditions are still at quite lofty levels, consistent with our expectation for the economy to enjoy solid rates of growth in the near-term. However, it is the longer-term growth picture that we are more concerned about, particularly as the contributions from LNG exports, temporarily higher commodity prices and the residential construction boom fade, putting pressure on the labour market. However, the RBA has made it clear that they are putting increased emphasis on financial stability concerns, which is likely to impact the response of monetary policy."

To be sure, the price of Australia's major commodity exports appears to be starting to weaken. Iron ore prices are currently trading around US$160/tonne, down 29% from this year's high of US$225/tonne. Similarly, the price of coking coal is down 7% to US$87.90/tonne from a high of US$94.50/tonne so far this year.

Oster is also on the money regarding the RBA's "emphasis on financial stability".

Just yesterday at the Bloomberg Breakfast conference, RBA Assistant Governor (Financial System) Michele Bullock underscored the Australian central bank's role of maintaining "overall financial stability".

"We are somewhat more explicit about recognising the potential human cost of financial instability in terms of financial distress and unemployment and are more attuned to the behavioural risks associated with risk cultures and financial innovations."

More specifically the risk from the re-acceleration in investment lending in the property market. "Certainly in terms of financial stability we are watching it because investors can the first ones to get out ...which could add to procyclicality".

While she hinted at macro-prudential policies to address "system-wide risks in a low interest rate environment," the RBA's growing concern over financial stability suggest that the best that could be hoped for in terms of a monetary policy response is for steady interest rates for a rate cut would only fan the flames of financial instability a bit more.

Read more: NABAustraliaAlan OsterBloomberg BreakfastNAB Business SurveyRBA Assistant Governor Financial System Michele Bullock
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