{CommSec Research} Finally! Business conditions rebound

dyno

Finally! Business conditions rebound

NAB Business Survey; Credit card lending

¾ The NAB business confidence index eased from +14 to +9.1 in March. The business conditions index recorded a healthy improvement rising from -2.0 to +9.4 in March – the highest reading in a year.

¾ Forward looking sub-indices were encouragingly higher. Profits turned around and recorded the best result in 15-months, while new orders moved back into expansion territory.

¾ The average credit card balance in February was up just 1.4 per cent on a year ago. The average balance rose by $81.80 to $3,296.60. Purchases made on debit cards rose by 25.8 per cent on a year ago – the fastest growth on record.

What does it all mean?

· Business confidence levels have remained healthy in recent months and the latest result is no different. What is more encouraging is the healthy pickup in business conditions – although it is of a very weak base. The improvement in weather conditions since the natural disaster has played an import role. But the key has been the fact that the Reserve Bank has remained on the interest rate sidelines for five consecutive months, allowing businesses to get back to focusing on what they do best.

· The importance of the improvement in trading conditions cannot be overstated, especially given that, had conditions remained weak for an extended period, confidence levels would have eventually followed suit. Key forward looking sub indices which had previously shown a contraction are now once again in expansionary mode. In fact the profitability sub-index recorded the best result in 15 months while the pipeline of new orders was once again increasing. The pickup in forwards orders comes after a eight month period of profound weakness and a sustained improvement needs to take place to claim activity levels are on the improve.

· In the near term, the weakness in consumer spending, slowdown in housing construction and impact of the Australian dollar in curbing exports will ensure that activity levels remain subdued. Added to which the higher oil price will also continue to feed through to petrol prices adding a further burden not only to business transport costs but also household budgets. As a result retailers are likely to continue aggressively discounting.

· CommSec expects the next rate hike to take place in August. The rebuilding phase following the natural disasters, should result in growth and activity rebounding quite dramatically in the second half of the year.

· Consumers continue to remain ultra conservative. The average credit card balance is barely growing at present with consumers much preferring to live within their own means. The average balance is up just 1.4 per cent on a year ago. And once inflation is taken into account, the average credit card balance is actually going backwards.

· Aussie consumers are increasingly using their own money (debit cards) to make purchases rather than put them on credit. Purchases made on using debit cards are up almost 23 per cent on a year ago – the fastest pace recorded.

What do the figures show?

National Australia Bank Business Survey:

· The National Australia Bank business confidence index eased from +14 to 9.1 in March.

· The business conditions index improved from -2 to 9.4 in March.

· The index of trading conditions recorded a healthy improvement in March, up from –3.0 to 14.7; profitability rose from -5.0 to 10.3; employment rose from +1.0 to +3.2; and forward orders rose from -4.0 to +3.1.

· The monthly reading of labour costs rose modestly from 0.8 per cent to 0.9 per cent in March. NAB noted that annual growth of labour costs stands at 3.7 per cent in March up from 3.5 per cent recorded in February.

· Inflationary pressures are well contained. Retail prices rose at a 0.1 per cent quarterly rate in March after a similar result in February. Purchase costs increased by a 1.3 per cent quarterly rate, and the annual rate rose from 1.9 per cent to 2.7 per cent.

· Capacity utilisation rose from 81 per cent to 81.5 per cent in March – in line with the decade average of 81.6 per cent.

Credit & debit card activity:

· Figures released from the Reserve Bank show that the average credit card balance, rose by $81.80 to $3,296.6 in February. The average credit card balance is only up 1.4 per cent on a year earlier.

· Of credit cards attracting interest charges, the average outstanding balance fell by $5.90 to $2,404.20. The average balance accruing interest is up 2.5 per cent on a year ago (slowest growth in a year).

· The number of credit card cash advances fell by 6.5 per cent in February. Credit card advances are now down 5.6 per cent on a year ago. Cash advances have been largely falling in annual terms for four years.

· The average credit card limit grew at a 1.5 per cent annual pace, below the rate of inflation and the slowest growth rate in records going back 16 years.

· The number of purchases made on credit cards grew by 7.6 per cent in February compared with a year ago.

· Total debit card transactions rose by 22.7 per cent on a year ago – marking the highest reading on record.

What is the importance of the economic data?

· The Reserve Bank releases data on credit and debit card transactions each month. The credit card figures are useful in highlighting consumer borrowing and spending trends.

· The monthly National Australia Bank business survey is valuable in providing a timely reading on the health of Corporate Australia. Key indicators of business conditions such as orders, employment, profitability and capacity use are covered together with a gauge on confidence levels.

What are the implications for interest rates and investors?

· The longer term prospects for the Australian economy remain robust. And if interest rates remain on hold over the next couple of month’s businesses and consumers will once again focus on investment and activity.

· The rebuilding phase following the floods and cyclone, should result in growth and activity rebounding quite dramatically in the second half of the year.

· CommSec expects the nest rate hike to take place in August.