Aussie Business Confidence Falls As Conditions Improve

Australian business confidence in September fell to 4.8 from 9.9 in August. It was as strong as 7.6 in July. Business conditions, in contrast, improved to 24.7 in September from 21.6 in August and 21.9 in July. Forward orders increased to 14.7 in September from 13.7 in August and 11.3 in July. Despite the one-month drop in confidence, business conditions and forward orders show improvement.

Monthly changes in the components can be erratic, but the three-month averages show a decline in business confidence. Business conditions components show declines in exports and in exporters’ sales in September and modest gains for the three-month average compared to the six-month average. September data focus on foreign weakness as an impediment.

Over both three months and six months, confidence deteriorates as conditions improve. The 12-month average compared to 12-month ago shows declines in business confidence as well as business conditions.

In September, most observations are above their historic means. The exception is the reading for confidence itself; it is a tick below its mean value. Among components exports are below to their historic mean with a -1 reading slightly below the mean of -0.8 for the period back to May 2002.

Ranking statistics show a good deal of strength. The overall confidence measure has a relatively weak reading with the rank standing in its 38th percentile. This compares to a three-month standing at its 56th percentile and a 12-month average standing in its 63rd percentile. These progressions show that as we look at more recent periods the standing of the confidence index is weaker; there has been some loss of momentum in confidence.

Business conditions are mostly strong However, among components of the business conditions reading, most rankings are in the 90th percentile and higher. The exceptions are the relatively low rankings for exports with a 41.6-percentile standing and exporters sales with the 39.2 percentile standing.

However, there are also high standings for metrics that are not favorable for the outlook: labor costs have a 98-percentile standing, purchase costs have a 97-percentile standing, and prices have a 98-percentile standing. There are strong expectations for inflation and, in addition to that, stocks have a very high 99.2 percentile standing. If stocks are full, firms are less likely to be ordering and filling up inventories further.

Still, forward orders have momentum. In addition to moving higher, their percentile standing is at the 97.6 mark in its historic queue of data. The readings on activity and inflation both are high giving rise to some uncertainty about what the future will look like.

Looking at changed comparing three-month averages to six-month average, some of the biggest changes in these components have come from improvements in trading conditions and from stocks. In contrast, orders are only up by 0.3 points over three months compared to six months, one of the weaker categories. To the extent that some of this begins to look like congestion, the good news is that capital expenditures are relatively strong; the three-month to six-month change logs a 1.6-point gain, the fourth largest among business conditions components. Firms are investing.

One of the hallmarks of this report is that business confidence has been fading and it fell relatively sharply between August and September. But its smoothed three-month moving average climbs over three months compared to six months and over six months compared to 12 months. Over those periods business conditions themselves have been improving.

While the inflation metrics continue to look troublesome, as they do most every other place in the world, and inventories appear to be overflowing, businesses continue to report solid profitability. The ranking of the reported profitability figures for September is at its 93.9 percentile.

Australia is no stranger to the changes and risks in the world economy. Australia has had a tough run with Covid and some geopolitical confrontations with China during the COVID period.

The question this survey raises is whether confidence is going to continue to erode, or whether the business conditions that have improved are going to continue to improve and pull confidence back up. For the moment, the domestic data from Australia appears relatively strong. But Australia is plugged into the world trading system and the standing of exports and exporters shows that there's a negative impulse there. The global economy is slowing down there are supply chain risks and there are plenty of geopolitical problems as well as inflation all around. Australia’s international neighborhood is sure to keep things interesting. The National Australia Bank (NAB) business survey offers some crosscurrents this month that we'll want to keep our eye on.