Business conditions in Australia are… solid.

That’s the brief synopsis of the latest business confidence report released by the National Australia Bank this morning with both business confidence and conditions holding at-or-above long-run averages in September.

“The survey is still consistent with reasonable performance of the non-mining economy, although momentum has eased from earlier in the year,” said the NAB following the release of today’s report.

“The business confidence index was steady at +6 index points in September. Meanwhile, business conditions (an aggregation of trading conditions (sales), profitability and employment) rose modestly in September, to +8 index points (from +7), although it has eased in trend terms.”

This table from the NAB details the movements in the survey’s individual subindices in September:

On the survey’s confidence measure, something that printed in line with its historic average, Alan Oster, chief economist at the NAB, suggested that “there was no hint that the RBA’s interest rate cut in early August had any further material impact on confidence in September after seemingly providing some support in August”.

“Business confidence is in line with its long-run average and while we would like to see confidence at even higher levels as a precursor to stronger non-mining business investment, this is still a good outcome given numerous uncertainties facing business, especially from offshore,” said Oster.

Despite a lift in the survey’s conditions index, leaving it above its historic average, Oster expressed a degree of caution towards the result, suggesting that it was driven largely by services industries, rather than by a broad-based improvement across the business spectrum seen earlier in the year.

“Business conditions have been consistently above their long-run average since early 2015, suggesting the recovery through the non-mining economy has become more entrenched,” he said.

“However, the strength in business conditions has once again become more heavily skewed towards major services industries after some promising signs of a broad-based recovery earlier in the year.

“We are also continuing to monitor negative trends in retail conditions, which deteriorated further in September – seemingly related to a jump in input costs.”

Taking some gloss off the boost in headline conditions index, led by a recovery in the measures on profitability and trading conditions, the survey’s employment subindex slipped from +4 to +1, indicating a deceleration in the number of firms which are currently hiring.

“The re-weakening in employment conditions is disappointing, although employment conditions remain in marginally positive territory consistent with adequate employment growth,” said Oster.

Continuing with the mixed nature of the September report, the survey’s forward indicators — gauges on potential activity levels in the months ahead — were also mixed with new orders surging at the same time capacity utilisation fell.

Oster suggests that this outcome points to “solid prospects in the very near-term”, although he acknowledged there was still a fair degree of uncertainty as to what it means over the longer term.

“We are watching the trend softening in capacity utilisation closely given our reservations about longer-term economic prospects,” he said.

“However, the softening in capacity utilisation is counter to the current strength in trading conditions and may possibly reflect elevated capital expenditure which could be adding to the level of capacity.”

At this point, Oster believes the survey “suggests a multi-speed economy, but one where most key non-mining sectors are performing well in the near-term”.

However, longer term, he is concerned about the weakness in conditions for retailers, particularly as household consumption makes up around 60% of Australian GDP.

“Weakening retail conditions are a significant risk to our outlook, especially considering that consumption accounts for more than 50% of Australian GDP,” he warns.

“Beyond the near-term, we still expect the economy to slow into 2018 as momentum from commodity exports, housing construction and AUD depreciation is lost.”

Based on that outlook, along with “ongoing low inflation”, Oster believes this will “jolt the RBA into action”, retaining the view that the bank will deliver two 25 basis points cuts in the second half of next year, leaving the cash rate at just 1%, the lowest level on record.

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