ANALYSIS: Another Divergence in NAB Survey as Confidence Drops

--Survey Shows Confidence Down Below Long-Run Average but Conditions Elevated

--Retail Sector Remains Main Area of Concern; Construction Best Performer

By Sophia Rodrigues

     SYDNEY (MNI) - National Australia Bank's August business survey showed

divergence between confidence and conditions -- adding to the already existing

disconnect between the business and consumer sectors. Together they pose a

threat to the Reserve Bank's optimistic outlook for the economy.

     The survey shows the money market may be overpricing risks of a RBA rate

rise in the second half of next year with an almost 76% chance of a 25 bps rise

priced by August 2018. It also suggests RBA Gov. Philip Lowe's plan to start

raising the cash rate as further progress is made in both unemployment and

inflation may take longer to come to fruition.

     The August survey, published Tuesday, showed business conditions remained

at the highest since early 2008 but confidence dropped to fall below the

long-run average. 

     Businesses that indicated deteriorating confidence in August mentioned

customer demand, government policy as well as cost pressures -- both energy and

wages -- as the most influential factors. The main risk is the drop in

confidence may weigh on business conditions in the months ahead.

     Business conditions were mainly supported by the construction industry

which saw the best employment conditions, an elevated level of forward orders

and a rise in purchase cost pressures.

     The biggest positive in the survey was a jump in employment conditions to

near records while the biggest negative was a weak trend in retail (zero in

trend terms), with forward orders in retail also down and employment conditions

in negative territory.

     The employment subindex at +11 points points to an annual job creation rate

of around 22,000 a month which would be sufficient to push the jobless rate

lower.

     However, the retail sector remains a concern with price inflation at -0.1%

in quarterly terms which suggests further headwinds to the consumer-price index.

     NAB chief economist Alan Oster will be watching the trend in retail closely

as household consumption is a notable point of difference between NAB's

relatively subdued growth outlook and the RBA's more sanguine forecasts and will

be important for the economy's sustained return to trend growth.

     While the recent run of better data may shift the risks towards a

sooner-than-expected rise in the RBA's cash rate the risks will ensure the RBA

will proceed with extreme caution, according to Oster. 

     Table from the August survey:

                                          August  July

------------------------------------------------------

Business Confidence                           +5   +12

Business Conditions                          +15   +14

Employment                                   +11    +7

Profitability                                +15   +16

Trading                                      +18   +19

Exports                                        0    -1

Forward Orders                                +4    +3

Stocks                                         0     0

Capital Expenditure                           +9    +5

Retail Prices (quarterly rate %)            -0.1   0.0

Labor costs (quarterly rate %)              +1.2  +0.6

Final products prices (quarterly rate %)    +0.4  +0.2

Capacity Utilization (%)                    81.6  81.9

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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