Embargoed until: 11.30am Thursday 20 October 2011 Quarterly Business Survey September quarter 2011 Business conditions slump and confidence falters mid-quarter, but monthly profile points to subsequent improving trend. Hours worked strengthens and capex remains strong. ! Business conditions stumbled in the September quarter, reflecting an economy that it is still struggling to find traction, while activity is also seemingly being impacted by global influences. In the quarter, falls were recorded in trading conditions, profitability and employment. Forward orders remained weak and stocks were negative, implying an expectation of softer near-term domestic demand. ! Conditions deteriorated across industries and states in the quarter. However, monthly data suggest that conditions had regained lost ground by the end of the quarter. ! The gap between weak & strong industries reached its largest in history. This largely reflected a significant weakening in the poor performers – similar to the 2000 slowdown. ! Business confidence fell heavily in the quarter, no doubt reflecting the volatility in equity and financial markets, heightened fears about debt contagion in Europe and the deterioration in conditions. Confidence fell across all industries and states. Consistent with conditions, monthly data showed a rebound in confidence at the end of the quarter, although it remained negative. !In new information contained in this survey, business capital spending intention s over the next 12 months fell a little in the September quarter, but remain at levels consistent with strong business investment (of around 10% per annum). Consistent with near term weaker activity and labour market data, employment expectations for the next 12 months also eased back. That said average hours worked increased, implying that employers may be delaying hiring until they feel more confident about future economic conditions – but in the interim are working their existing labour force harder. Lack of demand is expected to remain the most constraining factor on profitability over the year ahead, while interest rates, wage costs, capital capacity and suitable labour remained fairly unimportant. ! Product price inflation weakened to a more subdued annualised rate of 0.9%. Retail prices were relatively flat, which together with rising input costs implies weaker retail profit margins. Implications for NAB forecasts: ! No change to latest Global and Australian forecasts (released 11 October). Key quarterly business statistics** 2011q1 2011q2 2011q3 2011q1 201 1q2 2011q3 Net bal ance Net bal ance Business confi dence 10 5 -4 Trading 1 2 -4 Business conditions Profitabili ty -1 -1 -6 Current 2 2 -3 Employment 6 4 2 Next 3 months 15 10 5 Forward orders -1 -2 -2 Next 12 months 28 27 18 Stocks -1 -1 1 Capex pl ans (next 12) 26 29 21 Exports -2 -2 -2 % change % change Labour costs 0.7 0.6 0.8 Retail prices 0.0 0.1 0.0 Purchase costs 0.6 0.5 0.5 Per centFinal product s prices 0.3 0.3 0.2 Capa cit y utilisa ti on rate 81 .5 81.5 80.8 ** All data seasonally adjusted, except purchase costs and exports. Cost and prices data are percentage changes expressed at a quarterly rate. All other data are net balance indexes, except capacity utilisation, which is an average rate, expressed as a percentage. Fieldwork for this Survey was conducted from 24 August to 9 September, covering over 900 firms across the non-farm business sector. For more information contact: Alan Oster, Chief Economist (03) 8634 2927 0414 444 652 Next release: 8 November (October Monthly)
Business conditions slump and confidence falters mid-quarter, but
monthly profile points to subsequent improving trend. Hours workedstrengthens and capex remains strong.! Business conditions stumbled in the September quarter, reflecting an economy that it is still
struggling to find traction, while activity is also seemingly being impacted by global influences. Inthe quarter, falls were recorded in trading conditions, profitability and employment. Forward ordersremained weak and stocks were negative, implying an expectation of softer near-term domesticdemand.
! Conditions deteriorated across industries and states in the quarter. However, monthly datasuggest that conditions had regained lost ground by the end of the quarter.
! The gap between weak & strong industries reached its largest in history. This largely reflected asignificant weakening in the poor performers – similar to the 2000 slowdown.
!
Business confidence fell heavily in the quarter, no doubt reflecting the volatility in equity andfinancial markets, heightened fears about debt contagion in Europe and the deterioration inconditions. Confidence fell across all industries and states. Consistent with conditions, monthlydata showed a rebound in confidence at the end of the quarter, although it remained negative.
! In new information contained in this survey, business capital spending intentions over the next12 months fell a little in the September quarter, but remain at levels consistent with strongbusiness investment (of around 10% per annum). Consistent with near term weaker activity andlabour market data, employment expectations for the next 12 months also eased back. That saidaverage hours worked increased, implying that employers may be delaying hiring until they feelmore confident about future economic conditions – but in the interim are working their existinglabour force harder. Lack of demand is expected to remain the most constraining factor onprofitability over the year ahead, while interest rates, wage costs, capital capacity and suitablelabour remained fairly unimportant.
! Product price inflation weakened to a more subdued annualised rate of 0.9%. Retail prices wererelatively flat, which together with rising input costs implies weaker retail profit margins.
Implications for NAB forecasts:
! No change to latest Global and Australian forecasts (released 11 October).
** All data seasonally adjusted, except purchase costs and exports. Cost and prices data are percentage changes expressed at a quarterly rate.All other data are net balance indexes, except capacity utilisation, which is an average rate, expressed as a percentage. Fieldwork for this Surveywas conducted from 24 August to 9 September, covering over 900 firms across the non-farm business sector.
For more information contact:Alan Oster, Chief Economist(03) 8634 2927 0414 444 652
Business confidence levels fell heavily in theSeptember quarter, following on from asignificant decline in the previous quarter. Thedeterioration in confidence occurred during a
period of heightened global economic andfinancial market volatility, driven byuncertainty about the resolution of Europeansovereign debt woes and increasedspeculation that the US economy may slipback into recession.
Business conditions also deteriorated in theSeptember quarter and were indicative of aneconomy running at below trend growth. Theweakness in conditions may have reflectedthe ongoing flood recovery process, which
has taken longer than initially anticipated,compounded by the continued cautiousnessof households. Despite the weak quarterlyoutcome, the monthly profile shows thatconditions gained momentum in September after weakening in July and August.
the September quarter (down 5 points to-3 index points), to be 4 points below the long-run average level since 1989 (of +1 point).The deterioration in conditions reflecteddeclines in trading conditions, profitability andemployment. The soft decline in employmentcoincided with a pick up in average hoursworked (consistent with official labour forcesurvey data), suggesting that the labour market was in fact better than suggested bythe employment index alone. Monthly tradingconditions, profitability and employmentindices were fairly volatile in the September
quarter, fluctuating across ranges of 8, 4 and5 points respectively.
Net balance of respondents who regard last 3 months’ trading / profitability / employment performance as good.
As demonstrated in the monthly businesssurvey releases, quarterly data confirm thatvariation in business conditions has becomeincreasingly pronounced since late 2009. The
disparity between sector performance can beobserved by comparing business conditions of the (currently) strongest performing sectors(mining, transport & utilities, recreation &personal services and finance/ business/property) with conditions of the weakestperforming sectors (retail, manufacturing,construction and wholesale). As shown in thechart, the gap between conditions in theseindustries is currently at the highest levelobserved in history. One key feature of thecurrent period is that, like in 2000, the openingup of the gap has largely been explained by
deterioration in the weak industries – rather than a strengthening in one or two sectorssuch as mining.
-30
-20
-10
0
10
20
2000 2003 2006 2009 2000 2003 2006 2009
Net
bal.
-30
-20
-10
0
10
20
Net
bal.
Weak**
Business ConditionsQuarterly, seasonally adjusted
Strong*
* Strong industries include mining, transport & utilities, recreation & personal
services and finance/business/property
** Weak industries include retail, manufacturing, construction and wholesale
Gap between weak &strong industry conditions
Demand growth to stabilise
-4
-2
0
2
4
6
8
10
02 03 04 05 06 07 08 09 10 11
Domestic demand Prediction from orders
Forward orders (change & level) as an indicator of
domestic demand (6-monthly annualised)
GDP (ex coal) growth to pick up
-2
0
2
4
6
8
02 03 04 05 06 07 08 09 10 11
GDP Predi ct ion from bus conds
Business c onditions (change & level) as an indicator of
GDP (6-monthly annualised)
Based on the average forward orders in the September quarter from the monthly survey, weestimate that 6-monthly annualised demand growth was around 2!% in the September quarter.Similarly, based on historical relationships, the business conditions index implies that 6-monthlyannualised GDP growth (ex coal mines) would be around 2"-2!% (annualised) in the
September quarter. The survey is unable to capture the full impact of the floods on coal exportsat the beginning of the year, which is estimated to have detracted around 1" percentage pointsfrom GDP growth in H1 2011, and the subsequent bounce back.
(a) Quarter to which expectation applies. Business conditions next 12 m onths not seasonally adjusted.
Capacity utilisation falls
79
80
81
82
83
84
85
02 03 04 05 06 07 08 09 10 11
Capacity utilisation (per cent, s.a.)
Stock rebuilding expected
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5
10
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02 03 04 05 06 07 08 09 10 11
Stocks Nxt 3 months
Stocks (net balance, s.a.)
Capacity utilisation fell sharply in the September quarter, to be at its lowest level in two years.While monthly survey data also show a decline in capacity utilisation over the three months toSeptember, the decline was less pronounced than suggested by the quarterly survey.Furthermore, utilised capacity rose sharply in September, which may indicate an expectation of stronger near-term demand. This is consistent with the pick up in the stocks index in theSeptember quarter. Also next quarter stocks are expected to rise again – implying a further acceleration in near-term growth momentum.
Capital expenditure plans (12 months ahead) fell significantly in the September quarter, after rising gradually since mid-2009. Capital expenditure expectations deteriorated across allindustries, with the exception of mining and wholesale. Nonetheless, all industries continue toexpect investment to increase in the next twelve months. The survey measure of capexexpectations appears to be fairly consistent with the recent strength in ABS business investmentdata.
!"#!$%&#!'()'#*)!%+(,- ! .(/0-0'%/ !*012 !1/(30)4!0)+(,)5 !0)-6#)-7 Employment to ease
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0
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02 03 04 05 06 07 08 09 10 11 12
Employment Nxt 3 months
Nxt 12 months (n.s.a.)
Employment: current & expected (net balance)
Average hours bounce back
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-1
0
1
2
II III IV I II III IV I II III IV I II III IV I II III
2007 2008 2009 2010 2011
Quarterly Annual
Change in average hours worked (n.s .a.)
The employment index continued to trend lower in the September quarter, marking the fifthconsecutive quarterly decline in the series. Consistent with the fall in current employmentconditions, short-term and year-ahead employment expectations also weakened. However,expectations remain higher than the current index level, which suggests an expectation of increased future hiring and a subsequent tightening in the labour market. While employmentdata were softer in the quarter, average hours worked rebounded solidly, implying that theemployers may have delayed hiring and instead increased the hours of existing workers. Thistrend may continue until employers feel more confident about future economic activity, in whichcase they may commence hiring again. Changes in average hours worked varied acrossindustries; hours rose most significantly in recreation & personal services, while the largest fall
was in mining. Average hours were highest in construction and transport & utilities, and lowestin recreation & personal services, retail and wholesale.
(a) Quarter to which expectation applies. Employm ent conditions next 12 months not seasonally adjusted.
Lack of suitable labour constraint increasing
0
10
20
30
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50
60
70
80
02 03 04 05 06 07 08 09 10 11
Sales & orders Labour
Constraints on current output (% of firms)
0
10
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30
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50
60
70
80
02 03 04 05 06 07 08 09 10 11
Premises & plant Materials
Constraints on current output (% of firms)
The proportion of firms reporting sales, premises & plant and materials as a significant constrainton output ticked down in the September quarter. In contrast, a slightly larger proportion of firmsreported that the availability of suitable labour was a constraint on output compared to in theprevious quarter. That said, this constraint remains at levels significantly below that in the periodimmediately prior to the GFC.
Interest rates Wage costsAvailability of suitable labour
Main constraint on profitability (% of firms)
Demand is expected to be the main constraint on profitability over the next 12 months. In theSeptember quarter, interest rates became less of a constraint on profits (though they remainrelatively unimportant), while wage costs, the availability of suitable labour and inadequate capitalcapacity were all relatively unchanged and insignificant.
2010q3 2011q2 2011q3 2010q3 2011q2 2011q3
Constraints on output (% of firms)* Main constraints on profitability (% of firms)*
Business conditions: mining & recreation strongest; manufacturing weak
Business conditions (s.a., net balance)
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0
20
40
III IV I II III IV I II III IV I II III
2008 2009 2010 2011
M ining Manuf Constn
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0
20
40
III IV I II III IV I II III IV I II III
2008 2009 2010 2011
Retail WsaleTransp & uti l Rec & pers
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0
20
40
III IV I II III IV I II III IV I II III
2008 2009 2010 2011
Finance BusinessProperty
Business conditions deteriorated across all industries in the September quarter, with theexception of recreation & personal services, where conditions were a little stronger, and mining,where they were unchanged. Conditions remained strongest (by far) in mining, followed byrecreation & personal services and transport & utilities, while conditions were weakest inmanufacturing, retail and construction.
Business conditions: WA strongest; Victoria weakest
Business conditions (s.a., net balance)
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0
10
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30
40
III IV I II III IV I II III IV I II III
2008 2009 2010 2011
A us tralia NS W
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30
40
III IV I II III IV I II III IV I II III
2008 2009 2010 2011
A us tral ia V ICQLD
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III IV I II III IV I II III IV I II III
2008 2009 2010 2011
A us tralia S AWA
Business conditions weakened across all of the mainland states in the September quarter, withthe largest deterioration recorded in Victoria followed by SA and NSW. Conditions were strongest(and positive) in WA – reflecting strength in mining – while Victoria and SA reported the weakestconditions in the quarter.
Business confidence: mining strongest; finance & manufacturing weakest
Business confidence (s.a., net balance)
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0
20
40
III IV I II III IV I II III IV I II III
2008 2009 2010 2011
Mining Manuf Constn
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0
20
40
III IV I II III IV I II III IV I II III
2008 2009 2010 2011
Retail W saleTransp Rec & pers
-40
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0
20
40
III IV I II III IV I II III IV I II III
2008 2009 2010 2011
F inance Bus inessProperty
Business confidence deteriorated across all industries in the September quarter, with the largestdeterioration in finance/ business/ property – likely reflecting recent volatility in equity markets –followed by manufacturing – probably reflecting continued strain caused by the relatively highAUD. Confidence was strongest (and positive) in mining, followed by construction, where it wasneither expanding nor contracting. Particularly weak confidence was recorded in finance andmanufacturing.
Business confidence: broad-based falls across states, again. WAstrongest, Victoria weakest
Business confidence (s.a., net balance)
-40
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0
10
20
30
40
III IV I II III IV I II III IV I II III
2008 2009 2010 2011
Austral ia NSW
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0
10
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30
40
III IV I II III IV I II III IV I II III
2008 2009 2010 2011
Aus tral ia V ICQLD
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0
10
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III IV I II III IV I II III IV I II III
2008 2009 2010 2011
A us tral ia S AWA
Business confidence levels deteriorated across all mainland states for a second consecutivequarter. Confidence fell most significantly in Victoria, followed by WA and NSW. Consistent witha sharp deterioration, confidence was weakest in Victoria, while it was strongest in WA andQueensland (the two largest mining states).
Product price inflation softened in the September quarter, and remained fairly subdued at aquarterly annualised rate of 0.9%. Retail prices were even more subdued, recording zero growthin the quarter, after growth of 0.3% (at an annualised rate) in the previous quarter, reflecting thecurrent weakness in the retail sector and persistent cautiousness of consumers, which continuesto weigh on domestic demand. While a little softer than underlying CPI in the June quarter, thetrend in the quarterly NAB retail price series remains fairly consistent with official underlyinginflation data. (Note: underlying CPI data have been adjusted using the new ABS seasonaladjustment methodology, which will be used by the ABS from September quarter 2011 onwards – see here for more details.)
Labour costs pressures relatively tight, but expected to soften
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12
16
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1
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02 03 04 05 06 07 08 09 10 11
Wages & salar ies (LHS) Current (RHS)Nxt 3 months (RHS)
Labour costs & compensation of employees (% ann, s.a.)
Annualised labour costs growth rose to 3.2% in the September quarter, more than offsetting theslowing in growth in the previous quarter. The stronger outcome is likely to reflect the impact of Fair Work Australia’s national minimum wage decision, which became effective 1 July 2011.Wage increases under EBAs are expected to average 3.3% over the next year (2.3% after allowing for productivity offsets), which is a little softer than the June quarter expectation.
On average, businesses expect short-term interest rates to fall by 13 basis points (up 44 basispoints last quarter). Exchange rate expectations (6-months-ahead) were unchanged at $1.04 USin the September quarter.
Medium-term inflation expectations were relatively unchanged, with 28% of respondentsexpecting inflation to remain below 3% (unchanged from last quarter) and 62% expecting inflationof 3-4% (unchanged). Only 7% of respondents now believe that inflation is a serious problem(unchanged), while 47% (49% last quarter) believe it is a minor problem.
Expected house price inflation for the coming year was revised down to -1.2% (-1.0% lastquarter).
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New ZealandTony Alexander Chief Economist – BNZ +(64 4)474 6744Stephen Toplis Head of Research, NZ +(64 4) 474 6905Craig Ebert Senior Economist, NZ +(64 4) 474 6799Doug Steel Markets Economist, NZ +(64 4) 474 6923
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