Business becalmed…NAB Survey

The NAB Business survey is one of the must reads for any serious student of the Australian economy as it takes the pulse of such a big sample of the business population. Unfortunately the May monthly report released yesterday highlighted many of the issues we have been raising for some time and it looks like non-mining businesses are becalmed by an economy that is showing all the signs of debt fatigue and thus lack of spending. 

The headline that accompanied yesterday’s release of the NAB monthly Business Survey for May said that

“Domestic sector to struggle longer under weight of mining boom”.

It is a theme that you  have heard from us many times as we have decried the pressure that mining, or more precisely the RBA approach to making room for mining, was placing on the rest of the economy weighed down by debt and behavioural changes that have flowed from the realisation that debt must eventually be paid back. This is particularly the case  more recently as house prices have stopped rising. On this topic it is important to remember that the US economy started to weaken at pretty much the same time that house prices stopped rising in 2006. The crash took the economy down but no increase in equity arising from increased property values made consumers feel poorer, so they stopped spending.

So as house prices in Australia have been easing back, which we see as a natural result of the lack of demand for credit in the economy – remember there is a 97% quarterly correlation between credit demand and house prices – so the economy is softening.  As readers know we felt this softening in the economy would happen as a result of a changed approach to borrowing, structural change we would say, that has arisen from Australian households waking up with a post GFC debt hangover and a determination to pay it down. This has fundamental implications for an economy that had become used to increases in credit driving consumption growth at multiples of inflation. As this demand for credit has shrunk so then has overall economic activity and with it business conditions, sales and profitability.

The NAB said of the survey

“The domestic economy continued to soften in May, with business conditions now just a little above the relatively weak levels recorded in February immediately following the floods. Trading conditions, employment and profitability all fell. Business confidence also softened in May to be a little below its long-term average.

Conditions in retail, manufacturing, wholesale and construction are still very poor, while mining conditions outperformed all other industries. The high Australian dollar may be eroding sentiment in manufacturing and wholesale. Mining and finance/business/property remain the most confident.”

The chart below shows the downtrend in overall business conditions and confidence.

It is clear from the above chart that things are not terrible by any stretch of the imagination and we haven’t thought that. But the remergence of the down trend in both these measure we think is an indicator that we probably have a few months or more of readjustment to the realisation that the transmission mechanism between the mining boom and the rest of the economy is not as smooth nor direct as the RBA, Treasury, Pundits and the Government led many business owners to believe. Thus we think they need to, and will, adjust to a new norm of positive put slower growth than they were expecting. Unfortunately that will continue to put downward pressure on employment in the near term as the following chart shows.

Now clearly having expected this flat spot in the economy we don’t want to start to feedback data which confirms our suspicions of the weaker economic climate into a spiral of negativity and hand wringing over Australia’s economic prospects. But we note that the main stream media and many major economic and market commentators are only just coming around to, or at least moving toward, our way of thinking. The implication of this is  that this weakness is likely to get more play than it should all things being equal so it will further depress the outlook that we had already been expecting.

To this end the Australian  the Sydney Morning Herald and other state based morning dailies are running stories of the repayment stress. The Sydney Morning Herald’s headline of “Borrowers and banks in binge-buying hangover” speaks volumes of the dangerous way that the dawning of the reality of what is going on and the way it is reported can cause a negative feedback loop into households.

Today we get the release of the  Westpac Leading Index of economic growth but more importantly the Westpac MI Consumer Confidence numbers for June. We’ll see how they look and report back tomorrow.  The outlook for the Australian economy is not terrible  by any stretch but it is clearly less positive than it was 6-9 months ago. The RBA remains on hold for a while we think.

This blog is for information only and does not constitute advice. Neither Greg McKenna nor Lighthouse Securities has taken your personal circumstances, objectives or financial situation into account. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation or needs.

If you do need economic, investment or financial adviser we are happy to help and if you are an adviser and would like to join our network we are also happy to help.

Please Email the team at Lighthouse at or Greg directly on

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