Daily Commentary BY THE CURVE TEAM –

Collapsing Business Conditions Add to Deteriorating Outlook

30th of January, 2019

The trend of softer than expected domestic data that we have witnessed since the RBA’s last meeting in December continued yesterday. This time it was one of the most important monthly indicators which doesn’t bode well for the outlook.

December’s NAB business survey that was released yesterday showed that business conditions, after already drifting from their mid 2018 highs, collapsed in December. The index fell from 11 to 2, driven by substantial falls in profitability and trading conditions. The collapse in profitability had the index fall from 14 to 0 in just two months. Adding further pressure to business conditions was a fall in forward orders with the index falling below 0.

One bright spot from the conditions index was the employment sub index which held up ok. However, if the weakness in conditions persists then it would be appropriate to expect that hiring intentions would likely decline over the months ahead.

In the accompanying report to the survey, the NAB cautioned that the December survey  can sometimes be tricky to interpret. However the outcome sits consistent with other data already released for December which points to a material slowdown in economic activity going into the end of the year .

While the weak data to date has been of concern, the business survey will be of significant importance to the RBA. Strong business conditions was one of the key data points that the RBA repeatedly referenced when discussing their optimistic outlook.

Interestingly, we did hear from the RBA yesterday with Board member Ian Harper commenting on the recent data and its potential implications for the outlook.

Despite the string of weak data, prompting markets to price in a 70% chance of rate cut by the end of this year, Harper suggested that it is not as doom and gloom as many suggest. Harper said that “the domestic economy, everything I’ve seen, shows that it is still strong.”

Adding context to his comments, Harper went on to say:

“So long as jobs growth is strong and unemployment is low, then fears about some sort of collapse in consumption, or inability to be able to pay bills, really have to be put way down the list”

How much his comments reflect the views of the rest of the board will be more clear next week when we get an offical up date from the RBA following their board meeting on Tuesday.

Before we get there though, we have one more very important piece of information to be released. The ABS is scheduled to release the latest inflation data today at 11:30 and the market currently expects that both headline and core inflation will once again undershoot the RBA’s forecasts.

It all sets the scene for a very interesting week ahead for the monetary policy outlook.

Neyavan Suthaharan

Client Services Officer