Daily Commentary BY THE CURVE TEAM –

Business Survey Highlights Dichotomy in Australian Economy

14th of February, 2018

The dichotomy in the Australian economy was reinforced yesterday with the release of the latest monthly business survey. While the headline result points to continued strength in the business sector, the result when broken down by industry reinforces the RBA’s concern regarding the consumer.

The headline result from the business survey was solid once again. Business conditions bounced back to all time highs while confidence was also up. It should be noted that the survey has taken place ahead of the recent spike in volatility in global markets.

The employment index remains well above its long run average and points to ongoing strength in the labour market. As highlighted in their quarterly release, the rising number of firms reporting labour is a constraint on output points to a downward pressure on the unemployment rate over the months ahead.

However it wasn’t all good news with NAB Group Chief Economist saying that:

“On a less positive note, the slippage in conditions in recreation & personal services to the lowest level in three years bears close watching and, together with the ongoing weakness in retail conditions, points to continued softness in consumer activity”

This speaks volumes to the ongoing pressure on the consumers.

The hope is that the strength in the employment will eventually be enough to eat into the spare capacity in the labour force. Not only do we need to see strong employment growth push down the unemployment rate, but the underemployment rate needs to fall as well. That should then result in a much needed lift in wages for consumers.

The question will then be, after such a long period with weak wage growth, how quickly will an increase in wages feed through to the real economy? Will the consumer be confident to loosen the purse strings straight away or will they look to strengthen their household balance sheet before increasing consumption?

With so many unknowns around the outlook for consumption, you can see why the RBA sees it as the biggest risk to the outlook.

David Flanagan

Director - Interest Rate Markets