Australia - Discouraging outlook for business; Trade boom

Business confidence improves.

The NAB business confidence index improved from minus 1.2 to 1.8 in October in response. Business conditions fell from 2.3 to minus 0.8 in October.

The survey of 400 businesses took place from 25-31 October – before the latest interest rate cut.

Tourist arrivals fell but departures rose in September. Tourist arrivals fell for the sixth time in nine months, dropping 4.1 per cent in seasonally adjusted terms in September. And tourist departures edged 0.3 per cent higher.

Trade surplus narrows. Australia’s trade surplus eased by $389 million to $2564 million in September. Over the past 18 months, trade surpluses have totalled $34.2 billion. Exports fell by 2.5 per cent while imports fell by 1.3 per cent in the month.

What does it all mean?

The latest business confidence figures are hardly encouraging. Yes, confidence improved but it was from a sustained level of pessimism and remain well short of long-term averages. In addition, the key forward-looking indicators were decidedly weaker, trading conditions eased, profitability worsened, while forward orders contracted for the 15th time in 16 months. It is clear that at present Aussie businesses are remaining on the sidelines, uncertain about the outlook and remaining non-committal to investment plans.

Importantly, the latest survey occurred in late October, before the interest rate cut by the Reserve Bank on Melbourne Cup day. And as such it is likely that business confidence levels should receive a boost in ensuing months, although it is unlikely that one rate cut alone can have the profound effect of turning around the lacklustre business survey readings.

More likely, if the Reserve Bank wanted to provide a strong degree of support to the economy, a further rate cut would do just that. And it certainly has the scope to do so, especially given that the latest business survey has confirmed that overall inflationary pressures are mild and even non-existent in the retail space. CommSec expects a further rate cut to take place in February. However, if a solution to the European debt crisis is not forthcoming, it may result in policy makers cutting rates earlier to support the domestic economy.

Aussies continue to flock overseas in record numbers. Over the past year a record 7.64 million short-term departures were recorded. And while this doesn’t strictly translate to the number of people trekking offshore, it can’t be far off, suggesting that one in three Aussies went abroad for business or pleasure over the year. If retailers are wondering where all their customers have gone, they only need to visit the international terminal.

Australian consumers are devoting more of their budget to holidays and travel and this trend should continue for a while as the Aussie dollar remains perched above parity against the greenback. Tourism-reliant businesses will no doubt continue to experience challenging operating conditions but they will need to focus on tapping the opportunities presented by rising income levels through Asia. Almost 700,000 Chinese tourists (including Hong Kong) visited Australia over the past year, up almost 17 per cent over the year.

What do the figures show?

National Australia Bank Business Survey

The National Australia Bank business confidence index improved from minus 1.2 to 1.8 in October. The business conditions index fell from 2.3 to minus 0.8 in October.

The index of trading conditions eased from 3.7 to three.

Profitability worsened from minus 2.1 to minus 3.9

Employment fell from 2.9 to minus 1.2.

Forward orders contracted at a slower pace improving from minus four to minus 1.6. It was the 15th time in 16 months that forward orders had contracted.

The monthly reading of labour costs eased from a quarterly rate of one per cent in September to 0.6 per cent in October. Inflationary pressures are well contained. Prices rose at a 0.1 per cent quarterly pace, down from 0.3 per cent in October and 0.4 per cent in August. And retail prices were flat in October from after a similar result in September. Purchase costs rose at a 0.6 per cent quarterly rate in October, down from 0.7 per cent in September.

Capacity utilisation improved eased from 81.3 per cent in September to 80.8 in October – still below the decade average of 81.6 per cent.

The proportion of firms reporting that they did not require credit rose from 44 per cent to 46 per cent in October. In other words, just under half of all businesses aren’t seeking loans at present.

Overseas arrivals/departures

The number of Aussies travelling overseas for holidays or business rose by 0.3 per cent in seasonally adjusted terms in September after a similar gain in August. The actual number of tourist departures (663,500) was the second highest result on record behind April 2011. In trend terms, tourism departures were at record highs. Departures are up 8.7 per cent on a year ago in seasonally adjusted terms (up 10.2 per cent in trend terms).

And the number of people coming to Australia for holidays or business fell by 4.1 per cent in September – the first decline in three months after a 2.7 per cent increase in August. Arrivals are down 5.4 per cent on a year ago – the biggest fall in 26 months. In trend terms, arrivals lifted one per cent in September.

In seasonally adjusted terms, the tourism deficit – the gap between departures and arrivals – widened from 159,600 to 182,000 in September. But in trend terms the deficit eased from 167,700 to 164,500.

The number of net permanent and long-term arrivals to Australia has risen for the seventh straight month. In the 12 months to September, net long-term arrivals stood at a 14-month high of 226,770.

The net number of permanent settlers entering Australia (arrivals less departures) stood at 21,190 in September, up from 13,910 a year ago.

International trade

Australia’s trade surplus fell by $389 million to $2564 million in September. Exports of goods and services fell by 2.5 per cent, similarly imports of goods and services fell by 1.3 per cent in September. Exports are up 12.3 per cent on a year ago while imports are up 16.7 per cent.

Rural exports rose for the fifth time in six months, up 1.5 per cent. And non-rural exports fell by 1.5 per cent.

The main components contributing to the rise in seasonally adjusted estimates were:

Metal ores and minerals rose $1833 million (eight per cent).

Coal, coke and briquettes rose $966 million (eight per cent).

Non–monetary gold rose $919 million (27 per cent).

Within imports, consumer imports fell by 2.8 per cent in September with capital goods imports rose by 6.4 per cent while intermediate goods imports fell by 4.9 per cent.

Consumer goods imports are down 1.8 per cent on a year ago but capital goods are up 26.1 per cent and intermediate goods are up by 15 per cent.

What is the importance of the economic data?

The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

The Australian Bureau of Statistics releases data on overseas arrivals and departures is produced monthly and is an indicator of the health of the tourism sector. The figures are also useful in understanding spending trends and tracking migrant numbers – an indicator with widespread implications for employment, housing and spending.

The monthly International Trade in Goods and Services release from the Bureau of Statistics provides estimates on exports and imports of physical goods (such as coal, beef and computers) and services (such as travel receipts). The balance of goods and services (BOGS) is a narrower description of Australia’s external position than the current account estimates. The import data is a useful gauge of consumer and business spending while exports reflect global demand as well as domestic influences such as drought.

What are the implications for interest rates and investors?

The latest NAB business survey certainly doesn’t look overly encouraging. However, the recent interest rate cut should provide some degree of stimulus. Importantly, it will take a lift in consumer confidence and resulting pickup in consumer spending to support the business sector.

Inflationary pressures are well and truly contained and if it was required the Reserve Bank certainly has the scope to cut interest rates and support activity levels over coming months. The global environment particularly Europe will be a key factor in deciding the timing of the next rate cut.

CommSec

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