NAB Survey: Retail hits GFC levels

The June NAB Business Survey again makes pretty ordinary reading with Australia’s so called two-speed economy, other wise known to the sane as Dutch Disease, turning virulent. Here’s the commentary:

Domestic sector struggling to gain momentum as confidence slumps. Forecasts for growth lowered and rate rises delayed – reflecting current slowdown and, in the medium term, carbon.

Activity in the domestic economy was a little stronger in June, although overall conditions remained fairly subdued suggesting the economy is still struggling to find traction following the flood-induced slowdown. Business confidence deteriorated sharply in June, with the index now in line with the relatively weak levels recorded in December (surveyed immediately following the floods).

Conditions in retail fell to worryingly low levels (to around that of Nov 2008, just prior to the

Government’s initial cash handouts), while manufacturing, construction and wholesale were again poor. The high Australian dollar, continued cautiousness of households and concerns about the global outlook appear to be eroding sentiment, with weak confidence reported in construction, manufacturing, retail and wholesale. While conditions were weaker in mining, the outlook remains strong as reflected in high confidence levels.

Overall the gap between weak & strong industries is reaching historical highs (see page 3). This largely reflects weakening in the poor performers – similar to the 2000 slowdown.

Orders weakened in June and continued to contract; the stocks index was also lower, implying an expectation of softer near-term demand. Capacity utilisation marginally higher in the month at above average levels. Based on average conditions for the June quarter, we estimate 6-monthly annualised growth in domestic demand and GDP of around 3%. Labour costs growth picked up in the month, while price inflation was a little softer.

Let’s take a closer look at the components. First, business conditions by industry:

Changes in business conditions were mixed across industries in seasonally adjusted terms; conditions deteriorated significantly in mining and retail in June, while conditions improved notably in finance/business/property, recreation & personal and manufacturing (albeit to still poor levels). The strongest conditions were recorded in finance/business/property (+20), recreation & personal services (+17) and mining (+14), while business conditions were weakest (and negative) inn retail (-24), construction and manufacturing (both -5) and wholesale (-1). In trend terms, business conditions were again varied across industries. Trend conditions were strongest in mining (+27) and transport & utilities (+15) and weakest in retail (-13) and manufacturing (-8).

The survey is showing a clear bifurcation between reasonable conditions in finance and property and a collapse in retail (as well as ongoing weakness in manufacturing). At MB, we’ve spent some considerable time proving the link between house prices and retail spending so this result poses an interesting challenge. With housing finance stabilising (albeit at historically weak levels) and the finance/property sector showing reasonable conditions in the survey, we can draw two conclusions. Either retail is overshooting to the downside and will rebound and the forthcoming profit warnings for the sector are a buying opportunity or any strict correlation between house prices and retail spending is getting stretched. Some evidence that the latter might be the case is also available in recent month’s consumer confidence data, which has shown very depressed levels of household confidence in their financial outlook, as well as high levels of anxiety about petrol prices and taxes. With rates on hold to the end of the year, we may see some rebound in retail but I wouldn’t bet on it.

Next, business confidence:

In seasonally adjusted terms, business confidence levels fell across all industries with the exception of mining (up 6 points), and wholesale (unchanged). Confidence levels deteriorated most significantly in construction (down 21 to -14 points) followed by finance/ business/ property, retail and recreation & personal services. Consistent with the rise in confidence in the month, mining recorded the highest confidence levels (+17), followed by transport & utilities and finance/business/property (both +5). In contrast, construction recorded the weakest confidence (-14) followed by manufacturing (-2), retail and wholesale (both -1). Trend confidence was strongest in mining (+13) and finance/business/property (+11), and weakest in manufacturing (-2) and construction (-1).

Less promising for the key finance/property sector but otherwise pretty much in line with conditions, with manufacturers clearly upset that they’ve been targeted for destruction and construction somehow upset despite historic engineering capex.

NAB concludes:

Global growth is slowing from the exceptionally strong pace seen last year reflecting tighter policy, the Japanese disasters impact on global supply chains, oil prices and lower real household incomes. Despite this, global growth is expected to remain a touch above its 4% trend through 2011 and 2012, mainly due to solid outcomes in China, India, Latin America and the Asian Tiger economies.  Developed economy growth is nearer 2% while emerging economy growth is 6 to 7%.

Australian forecasts weaker in Q2 & Q3 reflecting continuing softness in discretionary spending, and delays in recovery of coal export volumes. Severe weakness in retail in latest survey, along with continuing softness in wholesale, parts of transport, manufacturing and construction points to ongoing softness. Strong export prices, mining investment and Queensland rebuilding expected to lift GDP growth in Q4 with more solid growth in 2012. In 2012/13 forecasts include tentative impacts from the carbon tax announcement (-0.2% off GDP). Inflation ¾% higher, assuming no wages impact. We now expect GDP growth of 1.7% in 2011 and 4.6% in 2012.

Next 25 bp rise in cash rate deferred until December, when growth momentum more apparent and labour market tightens significantly. Final 25 bp rise put back to May 2012.

The rate call seems fair enough all things being equal. But NAB’s version of the all things being equal is laughable to my eye. They seem to have not learned the lesson of 2011 or to be heeding the weakness apparent in their own survey. Where the hell is 4.6% growth going to come from in 2012? I mean, that’s miles above trend. And, would demand a complete turnaround in pretty much every sector. We’re already at 4.9% unemployment with a wary RBA. If conditions improve that far that fast, there’s no way the RBA will be on the sidelines. And with rising rates, a rising dollar and ongoing consumer caution, there’s no way we’ll get anywhere near 4.6%. And that says nothing about slowing global growth.

Futureboom! claims another victim.

David Llewellyn-Smith
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  1. “Where the hell is 4.6% growth going to come from in 2012?”

    Good question.

    A week or two ago the AFR ran their piece on consensus predictions by the major economic forecasters. Not surprisingly they all had the 4% or so growth next year, etc.

    My best guess (and this is based on seeing the forecasts of these same people over the last few years as they are adjusted) is that they all factor in a strong private residential construction activity boom in those years (even if the finance, immigration, approvals, land sales data suggests this is not about to happen). It is so ingrained in their psyche that we have a housing shortage, that we are underbuilding, and that no matter what is happening in the rest of the world, there MUST be a pickup in residential construction at some point.

    And they are right. Eventually.

    It just won’t be next year.

    • There’s just no way. A big bounce in residential construction would be hugely inflationary as construction competes head to head with the resources engineering boom. Add carbon tax. RBA would choke it.

      • If you believe the construction industry, they are underemployed and running out of jobs to do (Schools, Hospitals, Public Housing). I don’t know that their skills are so transferable to mining construction, or that they are willing to move so far away from their roots and investment properties.

        I agree – does not make sense.

        • Torchwood1979

          Word from a couple of tradie former schoolmates is that it really is slowing, most of their work is coming from maintenance instead of new construction. So I wouldn’t be surprised if everything is slowing, at least in the capital cities. Brisbane doesn’t have a massive mine last time I checked.

          Having said that, when the guys who left school in Grade 10 live in renovated Queenslanders and McMansions and drive brand new HSVs all the while complaining how tough it’s getting you know Australia is overdue for a recession.

          • “when the guys who left school in Grade 10 live in renovated Queenslanders and McMansions and drive brand new HSVs all the while complaining how tough it’s getting you know Australia is overdue for a recession”

            This would be truly hilarious if it wasn’t so true.

            I’ve just returned to Perth after living overseas for nine years. It is a different place, and SO expensive. It’s unfortunate that most people can’t see how the mining boom has actually buggered up the rest of society and the economy.

          • Firstly, those guys benefited, from the last decade or more, from not being part of the Clever Country. From securing a skilled trade and have those skills in considerable demand. For the last decade or so, that cannot be said of many graduates. It was their time in the sun – and good luck to them. And don’t worry, there’s lots of complaining everywhere.

            The mining boom has buggered up the rest of society! Funny I thought is was more likely an over-reliance on credit. How exactly has mining been so detrimental?

        • For what it’s worth there are definitely some construction trades that can easily apply their skills in the mining industry without much more learning. They might need a few more certifications to work in hazardous environments but it’s not a big deal. I know a young sparky who went from housing renovation to coal terminals and is now in the residential/commercial solar business.

  2. “Where the hell is 4.6% growth going to come from in 2012?” – they gotta keep the myth going!

    I’ve been supplying the retail market and exporting for 20 years beginning back in 1991 during the last recession. I can unequivocally say that this malaise in retail is the worst I’ve ever seen. Granted, there are some pockets of the local market which includes iphones, ipads, etc that are holding their own, but generally the mood is depressing.

    FWIW, I spoke to my bank manager yesterday about rolling over some funds in a fixed term and he informed me that last week two of his major accounts had gone into receivership. He flat out said, “This is the tip of the iceberg.”

    So to answer “Either retail is overshooting to the downside and will rebound…” Retail is heading south and far from the bottom.

    And “With rates on hold to the end of the year, we may see some rebound in retail but I wouldn’t bet on it.” I couldn’t agree more.

    A friend of a friend who is contracted by a couple of major brands as a third party repairer for TVs & camcorders has had to let some staff go and close one of his repair centres.

    Two weeks ago my accountant conveyed one of his clients who has a number of stores in Westfield Shopping Centres is only weeks away from going into receivership.

    IMO unemployment will noticeably rise before the end of this year – and I doubt elements of the MSM & Co propaganda machine will be able to convincingly spin it any other way.

  3. Excluding mining, I think it’s fair to say we have been in a recession for 6 or 9 months. I work in commercial furniture essentially doing fit outs of new offices and I would say we are down about 70% on this time last year. If it wasn’t for a few government jobs we’d have zero to do. Hearing all these forecasts by economists, you start to understand why they are the butt of so many jokes.

  4. I’m still not convinced of the recession in the main, non tourist population centres i.e Mel, Syd etc.

    There’s definitely a hit to small business and we’re seeing them close, but cafes and restaurants are booming. It’s not hard to drop $20 on coffee and a cake at these places, let alone triple that on dinner. When I stop seeing people lining up to get into these rip off merchants I’ll believe we’re down the chute.

    The rest of retail is getting creamed by O/S purchases, but where is the data on this?

  5. cheer up guys we are in a BOOOOM.
    the new taxes will create a bigger BOOOM.
    well for the tax eaters anyway, LOL
    wonder what happens when theres no more to expropriate….

    • Hang on though
      We need more taxes to support more bureaucrats, and we’ll need a lot more of those to administer the carbon tax. Pity we can’t take them away from say, administering the 8 or more different driving licences Australians need…..

  6. I personally expect that the economy will be showing real signs of trouble in the months leading up to the carbon tax and when that hits it will just push it off the cliff.

    Gillard will either be regarded in the future as a visionary who helped Austrlia get in front of the worldwide green technology and services boom or an idiot that pushed the economy over the edge to the worst recession in a generation for no reason…

    • she is gonna get creamed in the next election, bye bye labour.
      Adding more taxes into a depression, now thats genius. instead of cut spending the clowns put extra vig on????wowowowowow

  7. In my opinion the mining boom has been detrimental to society in many ways. Not least because the supernormal profits from the boom are not accruing to this country, from under who’s earth the commodities are being taken.

    But in terms of over-reliance on credit, this effectively means living beyond one’s means, which is made possible by an over-supply of credit and a meme which supports its propagation. Credit growth has been fuelled by overseas lenders pumping money into Australia on the basis that China is a one-way bet, Australia is the only (developed market) growth story in town and its yield is being made artificially high by effective sovereign insolvency elsewhere in the world.

    And in terms of impact on broader society, a couple of many examples:

    – service standards have dropped significantly. I believe this is because of shortage of staff owing to every man and his dog going bush to earn $$$ on a mine site. Also, most industries have become accustomed to having it ‘easy’, and they now find themselves unable to deal with slowing of (credit fuelled) demand growth.

    – capital has poured in to non-productive housing assets, which are now unaffordable to people who need them most (owner occupier first time buyers). It is not good for society that, in a family scenario, both parents need to work full time to be able to have any chance of meeting a mortgage (and two average wages basically maxes out disposeable income on mortgage repayments). Families are having children later and are spending less time with them because of the financial pressures of mortgage repayments. This is a big change to the Australia that I grew up in and I think it is bad for society as a whole.

    Again, these are just my opinions. It is also my opinion that history will reveal these two decades as being a massive missed opportunity for Australia.

  8. the mining boom?
    id say its more to do with the “service economy and lower wages”, the deindustrialisation, the fiat currency ponzi.

    And the state becoming huge and chocking the economy with useless programs aka socialism. Oh well humans learn the hard way.