The NAB survey for July, which was taken prior to the introduction of stage 4 restrictions in Victoria, saw a marked divergence between improving business conditions but weaker business confidence:
Business conditions rose 8pts in July to 0 index points, continuing the recovery since reaching a trough in April. The improvement was evident across each of the three sub-components, with trading and profitability now back in positive territory and the employment index continuing to improve. The improvement in conditions was broadbased across states but the monthly outcome was mixed across industries.
According to Alan Oster, NAB Group Chief Economist “business conditions have continued to recover almost as quickly as they deteriorated. Conditions have now recovered to be broadly around their pre-COVID level with improvements across the country. In the month, the outcomes across industries were a little more varied – possibly reflecting that there will be ongoing fallout for some sectors”.
Business confidence fell sharply in the month after rebounding strongly in recent months. Confidence declined across all industries, led by a decline in mining. In the non-mining sector, construction and retail saw relatively modest declines with the remaining industries declining by 17-19pts. Across all industries retail and construction have the weakest confidence despite the relatively small declines in the month.
“By industry, the decline in confidence was broad-based and it is again quite negative in each industry. Construction and retail are weakest, but only by a small margin. Despite being the most heavily impacted by virus containment measures so far, recreational & personal services is now the least pessimistic across industries.” said Mr Oster.
Forward orders saw a modest improvement as did capacity utilisation but both remain very weak compared with history. Thus, while conditions improved businesses continue to operate at a lower level than normal and with a smaller expected pipeline of work.
“While the improvement in conditions is very welcome, capacity utilisation and forward orders point to ongoing weakness overall. Therefore, with confidence still fragile there is some risk that conditions lose some of their recent gains in coming months” said Mr Oster.
The Survey was conducted prior to the escalation to stage 4 restrictions in Melbourne and stage 3 restrictions in the rest of Victoria. These measures will see likely see harder impacts on activity going forward, with mandated reductions in activity for a broader range of industries going forward.
“While the rebound in conditions is encouraging, the fall in confidence even prior to the announcement of stage 4 restrictions in Melbourne demonstrates that businesses will remain very cautious given the great uncertainty around the virus at the moment. It also highlights that the business sector will require ongoing support through the recovery phase until the economy can get back on its feet” Mr Oster said.
Next month’s survey will provide more insight s it will include the impacts of rising coronavirus cases in NSW and the stage 4 lockdown in Victoria.