Chief economist update: Confidence down, conditions up

Et tu, Brute? The Australian version of the Shakespearean drama, Julius Caesar, that saw Prime Minister Malcolm Turnbull politically assassinated (and replaced with the Federal Treasurer Scott Morrison) in the dying days of August may have played a part in the drop in the recent drop in business confidence.

The NAB monthly business survey revealed that Australian business confidence fell from a reading of +7 in July to a two-year low of +4 in August, taking it below the long-term average reading of +6. To be sure, there are other factors keeping domestic businesses from having a good sleep at night - Trump's trade protectionism, an emerging market currency rout, moderating global growth and commodity prices.

This could be a reflection of that other famous quote from Julius Caesar: "No one is brave enough that he is not disturbed by something unexpected." Business confidence should rebound in the coming months now that the leadership crisis has passed.

More so, given buoyant local business conditions despite the uncertainties emanating from global economies and markets. Australian business conditions increased to a reading of +15 in August from +13 in the previous month and remains way above its long-term average reading of +5.

Trading conditions improved to a reading of +19 in August from +18 in July and profitability jumped 6 points to +16 in August. The employment index was unchanged at a reading of +10 but, according to NAB's chief economist, Alan Oster: "The employment index (based on historical patterns) is consistent with jobs growth of around 23,000 per month. This is consistent with a declining unemployment rate over the latter part of 2018."

Stocks (inventories) increased four points to a reading of +6 and the jumped in forward orders from +2 in July to +5 indicates that this inventory re-stocking is not "unwanted".

The strength in household consumption reported in the June quarter National Accounts justifies businesses outlook to rebuild inventories.

The Australian economy expanded by a stronger than expected 0.9% in the June quarter, slower than the first quarter's 1.1% but enough to propel annual GDP growth rate up to 3.4% - the fastest in six years.

About half of the June quarter's growth was due to consumer spending. Household consumption grew by 0.7% over the second quarter, adding 0.4 percentage points to growth.

The strength in household consumption is also evident in the NAB business survey's price indices that showed retail prices accelerating at a quarterly rate of 0.9% in August from 0.5% in July and 0.1% in June - suggesting that businesses are able to pass on higher costs to consumers. Still low by the Reserve Bank of Australia's (RBA) inflation expectations but it's heading there.

Ben Ong is the Director of Economics and Investments at Rainmaker Group. He previously worked as a fund manager, economist, asset allocation strategist, portfolio analyst and stock market analyst. Check out his economics analysis here.

Read more: NABHouseholdJulius CaesarAlan OsterBruteFederal Treasurer Scott MorrisonNational AccountsPrime Minister Malcolm TurnbullReserve Bank of AustraliaTrump
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