From Westpac:
• The NAB business survey reported that business conditions jumped sharply in January, increasing to the highest level since October 2007.
• The survey was conducted from January 27 to February 3.
• In January, the conditions index rose by 6pts, following a 4pt increase in December, to be at +16. That is approaching the historic highs recorded pre-GFC.
• Business confidence responded to improved conditions and increased optimism in global conditions and financial markets, increasing by 4pts to +10. That is comfortably in the optimistic zone.
• The survey adds to the evidence and supports our view that the economy is emerging from the soft spot that prevailed during mid-2016.
• Notably: the disruption from the July Federal election has passed; monetary conditions eased following RBA rate cuts in 2016, reversing the tightening that occurred in the second half of 2015; global conditions have improved; commodity prices have spiked, boosting national income; and the drag from the mining investment downturn is waning.
• However, we are sceptical about the extent of the strength reported in the January NAB survey. We caution, large seasonal factors for January (typically a very quiet month) add to volatility at this time of year.
• The improvement in business conditions in January reflected an increase in trading conditions (+5pts to +22) and a strengthening in employment conditions (+6pts to +7), while profitability consolidated at high levels (+12). However, we note that forward orders were unspectacular at +2, down 3pts from the December high.
• By industry, business conditions have strengthened of late in the goods related sectors, namely manufacturing; construction; and transport & utilities. In January, consumer sectors improved. That said, the survey reported that conditions in the retail sector are still at weak levels, reflecting industry specific factors. Mining has improved, rebounding to zero, as commodity prices surge. Of note, the financial, business & property sector reportedly slipped in January, off the highs of mid-2016 associated with RBA rate cuts.
• By state, the Premier state of NSW roared back in January, to be at the top of the leader board consistent, with positive fundamentals (supported by low interest rates and a low dollar). Business conditions in NSW jumped 7pts to +23, to be in line with the average for the June quarter 2016. Victoria consolidated at high levels, +14, holding onto the December gains. Conditions are positive in Qld and South Australia, at +4, are at high levels in Tasmania, +19, and are less negative in the mining state of WA than they have been, lifting to -2.
The entire jump was in NSW.
Westpac’s is an appropriately sober view.
