Disleveraging and shocks

Yesterday’s quarterly NAB Business Survey threw up a shocker for December. However,  this blogger is more interested in the recently released monthly survey,which shows what a pounding business conditions took in January (find both below):

Trading, profitability, employment, forward orders, stocks, exports all smashed.

NAB foists the blame onto the QLD floods:

Business conditions tumbled 12 points nationally in January, pulled down by the severity of the Queensland floods. There were particularly severe impacts on trading conditions (down 16 points to -7 points) and profitability (down 13 to -10). Employment fell 5 points to a zero net balance, although all of this occurred outside Queensland where the employment index improved. However, the sharp decline in business conditions and capacity utilisation in Queensland (see  Focus on Queensland) suggests that hours worked declined heavily there.

Which is probably fair enough.

But the survey internals show up another dynamic, that over the past twelve months business conditions have steadily weakened. The state by state conditions bears this out:

Everywhere outside WA has been trending strongly downwards for a year. This is much bigger than flood damage. It’s an increasingly intense struggle in the services economy to get by:

The sectoral comparison shows the same pattern with retail, wholesale and manufacturing all deteriorating consistently for twelve months and in negative territory. Even construction is the same and it’s supposed to be suckling at the teat of the mining boom.

No guesses for why. The sector that leads them all, finance and realty, is also slowly but surely weakening.

Everything took a trend-accelerating downward hit in January, to the point where employment intentions are now zero.

No doubt there will be a bounce back in February but the larger trend looks entrenched and this blogger’s guess is that any bounce will be shallow or short-lived or both. As this blogger has said before, the disleveraging economy (that is, with falling demand growth for credit) has a fundamentally weak character. It is much closer to stall speed than the old leveraging-up economy. By way of example, let’s look at business conditions in the NAB survey for mid 2007, the last mining boom:

Basically, the two cycles are inverse reflections of one another.

The final giveaway comes from the presentation of the survey itself. Throughout it’s life, the NAB survey has graphed data through long time series extending back ten years. Now, it gives you two. The comparison is so bad that it’s upset NAB’s PR department.

There is no rate rise here. In fact, in the old normal, a survey this weak would clearly signal cuts. Worse, this is not an economy muscling up to absorb another shock, like an enduring spike in oil.


NAB Press Release 2010 Dec Qtr

David Llewellyn-Smith

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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  1. OK so we can all see this, so when do the FX traders see it? AUD isn’t priced for ‘no rate rise here’!

  2. Re “disleveraging” I saw a graph recently produced overseas indicating that the Australian economy in services and manufacturing is seriously underperforming and trending down. There is negligible reference to this in the Aust MSP.
    It seems the booming resourses sector is masking underlying economic weakness. Choose your domino (war,oil price shock, natural disaster, credit freeze) causing world recession, causing China slowdown, causing resourse price collapse, unemployment, asset deflation.

  3. Scott, it’s coming.

    Ben, the only fly in your argument is the raging bull market in iron ore.

    There’s some real weirdness going on in India exports. If that gets sorted, you definitely da man…

  4. Anyone worried about aussie inflation like the US are worried about their inflation (and therefore USD internal devaluation)? I am in between investments right now sitting on cash – but i’m even scared of cash right now because of inflation – perhaps i’m better off in the all-ords?

  5. IsCashKing – what causes inflation?

    Wage spirals? Increased government spending? Newly created credit?

    The last two are not happening – with Labor reluctant to borrow or raise taxes substantially (with an incredulous Coalition shaming them from doing either), and the banks wanting to stoke their printing presses, but only for residential mortgage lending, but their are no first home buyers left, just second/third and speculators who need to re-finance. Forget business finance too.

    Wage spiral – this has been reported today, with the only industry having any substantial increase being mining – all others have marginal, below real world inflation increases.

    I contend that we have seen the highest level of rates – the RBA may make the mistake of raising them another 25 or even 50 bps, and their fans are pushing the “fact” that they will do so, but this economy faces deflationary pressures going forward, not inflationary, IMHO.

    Consider the 10-35bps rise by the big Four banks in Nov/Dec almost crushed consumer confidence coming into Xmas and the NY. Imagine another official 25-50bps plus the inevitable unofficial 10-60+bps on top of that and what discretionary spending plummet.

    • Can the RBA raise rates by a token amount, say 10bps, so that all the bank economist and bank sponsored media pundits finally STFU?