Daily Commentary BY THE CURVE TEAM –

Business Conditions Flatline

13th of May, 2020

The peak of the lockdown in Australia saw business conditions flatline and suggests further weakness ahead.

As the lockdown in Australia was at its peak during April, business conditions fell to levels worse than what was seen during the depths of the GFC. After falling to -22 in March, the index slumped a further 12 points to -34. All industries, with the exception of mining, have conditions sitting deeply in negative territory.

Drilling deeper into the conditions index and there were sharp falls across all categories. Trading conditions and profitability were hit hard, falling to -33 and -35 respectively. However, it was the other components that point to further weakness ahead.

The employment index fell from -20 to -35, while capacity utilisation sunk to 72 from 81.2 only two months ago. The fall in the employment index suggests that businesses are either planning to shed headcount or at best maintain current levels. Meanwhile, the huge drop in capacity utilisation suggests businesses will be need to see a substantial turnaround before needing to invest or expand. Finally, forward orders continued to sink, suggesting further weakness to come.

Business confidence, while improving over the month, also suggest further weakness ahead. The index rebounded from its biggest ever fall, improving from -65 to -46. Despite the improvement, business confidence is still twice as low as what was experienced during the recession of the early 1990’s.

With the economy starting to reopen over the course of May, it will be interesting to see what sort of improvement in business conditions evolves over the month. If it proves underwhelming business confidence is likely to remain weak.

The same could be said for consumer confidence as the economy reopens. Today we will get the latest consumer sentiment survey which will predate most of the recent announcements around the winding back of containment measures. It should provide an interesting snapshot to the state of consumer confidence.

David Flanagan

Director - Interest Rate Markets