Australian Economy Unlikely To See A Material Improvement In The Short-Term, Say NAB

The research division of National Australia Bank (ASX: NAB) has released its monthly Business Survey for September 2019. As per the survey, the business conditions rose 1-point in September to +2 index points, recording a sixth consecutive below-average month, demonstrating ongoing weakness in the business sector.

The recent rate cuts by Australian central bank will help but will lag, says NAB Group Chief Economist Alan Oster. As per Mr. Oster, Australian economy is unlikely to see a material improvement in the short-term, majorly due to weak consumer and higher global uncertainty.

During the September month, conditions edged up 1pt and confidence edged lower, while profitability and trading conditions remained below average.

Major takeaways from NAB’s Business Survey:

  • Business confidence edged 1pt lower – now at 0 index points, the threshold between improving and deteriorating confidence in aggregate;
  • Retail and wholesale (the goods distribution industries) are weakest – a reflection of conditions in the household sector;
  • Manufacturing and construction are also weak, reflecting the dynamics in the housing sector and possibly some impact from global trade turmoil;
  • Conditions are likely to continue a below-average trend;
  • Rice indicators suggest inflationary pressure is likely to remain weak;
  • Global uncertainty is heightened on the back of trade ructions – and the exchange rate has depreciated.

NAB expects that the recent rate cuts by RBA and the tax refunds will improve the retail sector but expects the conditions to remain deeply negative.

RBA’s View on Domestic and Global Economy

In an economic update released on 24 September 2019, RBA’s Governor Philip Lowe noted that the global economy is still growing reasonably well, but the risks are increasingly tilted to the downside which is causing businesses to reconsider their spending plans.

While commenting on the Australian economy, he told that he is not expecting a return to strong economic growth in the near term and noted that the main source of domestic uncertainty continues to be the strength of household spending.

World Growth (Year-Average) (Source: IMF)

The above graph shows global economic growth and IMF forecasts for the next few years.

Recently, when RBA reduced its interest rate by 25 basis points to 0.75 per cent, RBA’s Governor, in its speech highlighted that US–China trade and technology disputes are affecting international trade flows and noted that in most advanced economies, the employment rates are low and wages growth has picked up.

RBA Governor also noted that the employment has continued to grow strongly in Australia and labour force participation is at a record high, but the forward-looking indicators of labour demand are indicating that employment growth is likely to slow from its recent pace.

Labour Force Figures for August 2019

As per Labour force figures for August 2019, in seasonally adjusted terms, employment increased by 34,700 to 12,926,900 persons in August 2019, while full-time employment decreased by 15,500 to 8,818,000 persons and part-time employment increased by 50,200 to 4,108,900 person.

Notable Seasonally Adjusted Estimates for August 2019:

  • Unemployment increased by 4,100 to 716,800 persons;
  • Participation rate increased by 0.1 pts to 66.2%;
  • Unemployment rate increased by less than 0.1 pts to 5.3%;
  • Monthly hours worked in all jobs increased by 3.9 million hours to 1,782.6 million hours

Unemployment Rate Chart (Source: ABS)

Due to the US–China trade and technology disputes, the forward-looking indicators for trade and investment have declined, plus, the spillovers from an escalation of tensions in Hong Kong or the Middle East or a disorderly Brexit could trigger a slowdown, as noted in RBA’s recent Financial Stability Review report.

RBA’s View on Risks in Housing Markets

In the recently released Financial Stability Review report, RBA informed that in the near-term, risks from fall in housing prices have reduced but still exist.

As per RBA:

  • The increase in housing prices and prices in Sydney and Melbourne has reduced the risk that sustained falls in housing prices;
  • However, the rental vacancy rate in Sydney is relatively high;
  • The fall in housing demand and prices over the past couple of years and tighter credit supply for developers, has resulted in residential building approvals falling sharply;

As per Australian Bureau of Statistics (ABS), the residential property prices fell 0.7% in 2019 June quarter, majorly led by the Melbourne (-0.8 per cent) and Sydney (-0.5 per cent) property markets.


  • Prices fell by 9.6% in Sydney and 9.3% in Melbourne;
  • Hobart (+2.0 per cent) was the only capital city to record positive through the year growth;
  • The total value of Australia’s 10.3 million residential dwellings fell by $17.6 billion to $6,610.6 billion in the June quarter 2019;
  • The total value of residential dwellings has fallen for five consecutive quarters, down from $6,957.2 billion in the March quarter 2018;

As per, NAB Group Chief Economist, the housing downturn and the weakness in the retail sector are likely to continue to play out further.

Despite facing major risks in the economy, the Australian financial system remains resilient with capital ratios for major banks remaining at high levels by both historical and international standards.

RBA’s view on Australian Financial System

  • As a result of actions taken in response to the lessons learned from the financial crisis, the resilience of the Australian financial system has steadily improved;
  • Due to the implementation of major post-financial crisis international reforms in Australia, the banks are now required to hold more capital and liquid assets;
  • On an internationally comparable basis, Australian banks’ Tier 1 capital ratios are within the top quartile of equivalent banks and are well within the range needed to withstand the magnitude of shocks associated with most historical banking crises internationally.


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