Embargoed until: 11.

30am Thursday 20 October 2011

Quarterly Business Survey

September quarter 2011

Business conditions slump and confidence falters mid-quarter, but monthly profile points to subsequent improving trend. Hours worked strengthens and capex remains strong.
Business conditions stumbled in the September quarter, reflecting an economy that it is still struggling to find traction, while activity is also seemingly being impacted by global influences. In the quarter, falls were recorded in trading conditions, profitability and employment. Forward orders remained weak and stocks were negative, implying an expectation of softer near-term domestic demand. ! Conditions deteriorated across industries and states in the quarter. However, monthly data suggest that conditions had regained lost ground by the end of the quarter. ! The gap between weak & strong industries reached its largest in history. This largely reflected a significant weakening in the poor performers similar to the 2000 slowdown. ! Business confidence fell heavily in the quarter, no doubt reflecting the volatility in equity and financial markets, heightened fears about debt contagion in Europe and the deterioration in conditions. Confidence fell across all industries and states. Consistent with conditions, monthly data showed a rebound in confidence at the end of the quarter, although it remained negative. ! In new information contained in this survey, business capital spending intentions over the next 12 months fell a little in the September quarter, but remain at levels consistent with strong business investment (of around 10% per annum). Consistent with near term weaker activity and labour market data, employment expectations for the next 12 months also eased back. That said average hours worked increased, implying that employers may be delaying hiring until they feel more confident about future economic conditions but in the interim are working their existing labour force harder. Lack of demand is expected to remain the most constraining factor on profitability over the year ahead, while interest rates, wage costs, capital capacity and suitable labour remained fairly unimportant. ! Product price inflation weakened to a more subdued annualised rate of 0.9%. Retail prices were relatively flat, which together with rising input costs implies weaker retail profit margins. Implications for NAB forecasts: ! No change to latest Global and Australian forecasts (released 11 October). ! Key quarterly business statistics**
2011q1 Business confidence Business conditions Current Next 3 months Next 12 months Capex plans (next 12) Labour costs Purchase costs Final products prices 10 2 15 28 26 2011q2 2011q3 Net balance 5 -4 -3 5 18 21 0.8 0.5 0.2 Trading Profitability Employment Forward orders Stocks Exports Retail prices Capacity utilisation rate 2011q1 1 -1 6 -1 -1 -2 2011q2 2011q3 Net balance -4 -6 2 -2 1 -2 0.0 80.8

2 10 27 29 % change 0.7 0.6 0.6 0.5 0.3 0.3

2 -1 4 -2 -1 -2 % change 0.0 0.1 Per cent 81.5 81.5

** All data seasonally adjusted, except purchase costs and exports. Cost and prices data are percentage changes expressed at a quarterly rate. All other data are net balance indexes, except capacity utilisation, which is an average rate, expressed as a percentage. Fieldwork for this Survey was conducted from 24 August to 9 September, covering over 900 firms across the non-farm business sector.

For more information contact: Alan Oster, Chief Economist (03) 8634 2927 0414 444 652

Next release: 8 November (October Monthly)

Embargoed until 11.30am Thursday 20 October 2011

Analysis
Business confidence levels fell heavily in the September quarter, following on from a significant decline in the previous quarter. The deterioration in confidence occurred during a period of heightened global economic and financial market volatility, driven by uncertainty about the resolution of European sovereign debt woes and increased speculation that the US economy may slip back into recession. Business conditions also deteriorated in the September quarter and were indicative of an economy running at below trend growth. The weakness in conditions may have reflected the ongoing flood recovery process, which has taken longer than initially anticipated, compounded by the continued cautiousness of households. Despite the weak quarterly outcome, the monthly profile shows that conditions gained momentum in September after weakening in July and August.
Quarterly
2010q3 2010q4 2011q1 2011q2 2011q3 2011m5 2011m6

Confidence falls again

Confidence & conditions (net balance., s.a.) 30 20 10 0 -10 -20 -30 -40 02 03 04 05 06 07 08 09 10 11

Conditions Conds 1990s recn

Confidence Conf 1990s recn

Confidence = excluding normal seasonal changes, how do you expect the business conditions facing your industry in the next 3 months to change? Conditions = average of the indexes of trading conditions, profitability and employment.

Monthly
2011m7 2011m8 2011m09

Confidence Conditions

8 5

5 3

10 2

5 2

-4 -3

6 0

0 2

1 -1

-9 -3

-2 2

The business conditions index weakened in the September quarter (down 5 points to -3 index points), to be 4 points below the longrun average level since 1989 (of +1 point). The deterioration in conditions reflected declines in trading conditions, profitability and employment. The soft decline in employment coincided with a pick up in average hours worked (consistent with official labour force survey data), suggesting that the labour market was in fact better than suggested by the employment index alone. Monthly trading conditions, profitability and employment indices were fairly volatile in the September quarter, fluctuating across ranges of 8, 4 and 5 points respectively.
Net balance of respondents who regard last 3 months trading / profitability / employment performance as good.

Conditions weaken further

Business conditions components (net bal., s.a.) 30 20 10 0 -10 -20 -30 -40 02 03 04 05 06 07 08 09 10 11

Trading Employment

Profitability Conds 1990s recn

Quarterly
2010q3 2010q4 2011q1 2011q2 2011q3 2011m5 2011m6

Monthly
2011m7 2011m8 2011m09

Trading Profitability Employment

6 4 6

3 0 6

1 -1 6

2 -1 4

-4 -6 2

2 -1 2

4 -2 5

1 -3 -2

-3 -6 0

5 -2 3

Embargoed until 11.30am Thursday 20 October 2011

Analysis (cont.)
As demonstrated in the monthly business survey releases, quarterly data confirm that variation in business conditions has become increasingly pronounced since late 2009. The disparity between sector performance can be observed by comparing business conditions of the (currently) strongest performing sectors (mining, transport & utilities, recreation & personal services and finance/ business/ property) with conditions of the weakest performing sectors (retail, manufacturing, construction and wholesale). As shown in the chart, the gap between conditions in these industries is currently at the highest level observed in history. One key feature of the current period is that, like in 2000, the opening up of the gap has largely been explained by deterioration in the weak industries rather than a strengthening in one or two sectors such as mining.
Business Conditions
Net bal.

Quarterly, seasonally adjusted Strong*

Net bal.

20 10 0 -10 -20 Weak** -30 2000 2003 2006 2009 2000 2003 2006 2009
* Strong industries include mining, transport & utilities, recreation & personal services and finance/business/property ** Weak industries include retail, manufacturing, construction and wholesale

20 Gap between weak & strong industry conditions 10 0 -10 -20 -30

Demand growth to stabilise

Forward orders (change & level) as an indicator of domestic demand (6-monthly annualised) 10 8 6 4 2 0

GDP (ex coal) growth to pick up

Business conditions (change & level) as an indicator of GDP (6-monthly annualised) 8

0
-2 -4 02 03 04 05 06 07 08 09 10 11

-2 02 03 04 05 06 07 08 09 10 11

Domestic demand

Prediction from orders

GDP

Prediction from bus conds

Based on the average forward orders in the September quarter from the monthly survey, we estimate that 6-monthly annualised demand growth was around 2!% in the September quarter. Similarly, based on historical relationships, the business conditions index implies that 6-monthly annualised GDP growth (ex coal mines) would be around 2"-2!% (annualised) in the September quarter. The survey is unable to capture the full impact of the floods on coal exports at the beginning of the year, which is estimated to have detracted around 1" percentage points from GDP growth in H1 2011, and the subsequent bounce back.

Embargoed until 11.30am Thursday 20 October 2011

Analysis (cont.)
Expectations decline
Business conditions & expectations (net balance) 40 30
10 20

Orders expected to weaken

Forward orders & expectations (net balance, s.a.)

20 10 0 -10
-20 0

-10

-20 -30 02 03 04 05 06 07 08 09 10 11 12
-30 02 03 04 05 06 07 08 09 10 11

Conditions Nxt 12 months (n.s.a.)

Nxt 3 months

Orders

Nxt 3 months

Short and long-term expectations for business conditions and forward orders all deteriorated further in the September quarter.
2011q2 Conditions Conds. next 3m Conds. nxt 12m Orders Orders next 3m 2 15 28 -2 12 Quarterly 2011q3 2011q4 -3 10 30 -2 6 5 26 3
(a)

Monthly 2012q2 2012q3

2011m05 2011m06 2011m07 2011m08 2011m09

0 27 18 -3

-1

-3

-5

-6

-5

-4

(a) Quarter to which expectation applies. Business conditions next 12 months not seasonally adjusted.

Capacity utilisation falls

Capacity utilisation (per cent, s.a.) 85 84 83 82 81

Stock rebuilding expected

Stocks (net balance, s.a.) 15 10 5 0 -5 -10

80 79 02 03 04 05 06 07 08 09 10 11

-15 -20 02 03 04 05 06 07 08 09 10 11

Stocks

Nxt 3 months

Capacity utilisation fell sharply in the September quarter, to be at its lowest level in two years. While monthly survey data also show a decline in capacity utilisation over the three months to September, the decline was less pronounced than suggested by the quarterly survey. Furthermore, utilised capacity rose sharply in September, which may indicate an expectation of stronger near-term demand. This is consistent with the pick up in the stocks index in the September quarter. Also next quarter stocks are expected to rise again implying a further acceleration in near-term growth momentum.
2010q4 Capacity utilis. Stocks current Stocks next 3m 81.2 0 -2 2011q1 81.5 -1 -1 Quarterly 2011q2 2011q3 81.5 -1 2 80.8 1 -4
(a)

Monthly 2011q4
2011m05 2011m06 2011m07 2011m08 2011m09

81.5 1 0

81.6 -2

80.4 3

80.4 2

81.3 -1

(a) Quarter to which expectation applies. All data are seasonally adjusted.

Embargoed until 11.30am Thursday 20 October 2011

Analysis (cont.)
Capex plans edge soften
Business confidence & capex plans 30 20 10 0 -10 -20 -30 -40 02 03 04 05 06 07 08 09 10 11 12
Business investment annual growth (LHS) Capex 12m advanced 2 qtrs (n.s.a., RHS)

Investment expected to fall, but remains elevated

Business investment & capex plans

50 40 30 20 10 0

30 20 10 0 -10 -20

40 30 20 10 0 -10 -20 02 03 04 05 06 07 08 09 10 11 12

-10 -20
-30

Confidence (LHS) Capex 12m advanced 2 qtrs (n.s.a., RHS)

Capital expenditure plans (12 months ahead) fell significantly in the September quarter, after rising gradually since mid-2009. Capital expenditure expectations deteriorated across all industries, with the exception of mining and wholesale. Nonetheless, all industries continue to expect investment to increase in the next twelve months. The survey measure of capex expectations appears to be fairly consistent with the recent strength in ABS business investment data. !"#!$%&#!'()'#*)!%+(,-!.(/0-0'%/!*012!1/(30)4!0)+(,)5!0)&#1-6#)-7

Employment to ease
Employment: current & expected (net balance) 30 20 10

Average hours bounce back

Change in average hours worked (n.s.a.) 2

0
0 -10 -20

-1

-2

-30 02 03 04 05 06 07 08 09 10 11 12

-3 II III IV I 2007 II III IV I 2008 II III IV I 2009 Quarterly II III IV I 2010 Annual II III 2011

Employment Nxt 12 months (n.s.a.)

Nxt 3 months

The employment index continued to trend lower in the September quarter, marking the fifth consecutive quarterly decline in the series. Consistent with the fall in current employment conditions, short-term and year-ahead employment expectations also weakened. However, expectations remain higher than the current index level, which suggests an expectation of increased future hiring and a subsequent tightening in the labour market. While employment data were softer in the quarter, average hours worked rebounded solidly, implying that the employers may have delayed hiring and instead increased the hours of existing workers. This trend may continue until employers feel more confident about future economic activity, in which case they may commence hiring again. Changes in average hours worked varied across industries; hours rose most significantly in recreation & personal services, while the largest fall was in mining. Average hours were highest in construction and transport & utilities, and lowest in recreation & personal services, retail and wholesale.

Embargoed until 11.30am Thursday 20 October 2011

Analysis (cont.)
Average hours worked high in construction, low in recreation & personal services and retail
Change in average hours worked by industry over the past year (n.s.a.)
6 4 2 0 -2 -4 -6 2007 2008 2009 2010 Manuf 2011

6 4 2 0 -2 -4 -6 2007 2008 2009 2010 2011

6 4 2 0 -2 -4 -6 2007 2008 2009 2010 2011

Mining Constn

Retail Transp & util

Wsale

Finance Property

Business

2011q2 Empl current Empl next 3m Empl nxt 12m 4 11 19

Quarterly (a) 2011q3 2011q4 2 8 19 5 17

Monthly 2012q2 2012q3

2011m05 2011m06 2011m07 2011m08 2011m09

2 16 9

-2

(a) Quarter to which expectation applies. Employment conditions next 12 months not seasonally adjusted.

Lack of suitable labour constraint increasing

Constraints on current output (% of firms) 80 70 60 50 40 30 20 10 0 02 03 04 05 06 07 08 09 10 11 80 70 60 50 40 30 20 10 0 02 03 04 05 06 07 08 09 10 11 Constraints on current output (% of firms)

Sales & orders

Labour

Premises & plant

Materials

The proportion of firms reporting sales, premises & plant and materials as a significant constraint on output ticked down in the September quarter. In contrast, a slightly larger proportion of firms reported that the availability of suitable labour was a constraint on output compared to in the previous quarter. That said, this constraint remains at levels significantly below that in the period immediately prior to the GFC.

Embargoed until 11.30am Thursday 20 October 2011

Analysis (cont.)
Demand still keeping profitability low
Main constraint on profitability (% of firms) 80 70 60 50 40 30 20 10 0 02 03 04 05 06 07 08 09 10 11 80 70 60 50 40 30 20 10 0 02 03 04 05 06 07 08 09 10 11 Main constraint on profitability (% of firms)

Inadequate capital capacity All other

Demand

Interest rates Availability of suitable labour

Wage costs

Demand is expected to be the main constraint on profitability over the next 12 months. In the September quarter, interest rates became less of a constraint on profits (though they remain relatively unimportant), while wage costs, the availability of suitable labour and inadequate capital capacity were all relatively unchanged and insignificant.
2010q3 Constraints on output (% of firms)* Sales & orders 55.0 Labour 43.9 Premises & plant 24.4 Materials 15.4
* not s.a.

2011q2 58.4 47.3 22.5 16.1

2011q3 57.7 48.5 21.7 13.6

2010q3

2011q2

2011q3 3.9 10.8 10.2 2.8 46.0 26.3

Main constraints on profitability (% of firms)* Interest rates 5.1 7.1 Wage costs 10.0 10.6 Labour 10.1 10.3 Capital 2.9 2.5 Demand 44.2 43.5 All other 27.7 26.0

Embargoed until 11.30am Thursday 20 October 2011

Industry and state analysis

Business conditions: mining & recreation strongest; manufacturing weak
Business conditions (s.a., net balance)
40 40

40

20

20

20

-20

-20

-20

-40 III IV I II III IV I II III IV I II III 2008 2009 Mining Constn 2010 2011 Manuf

-40 III IV I II III IV I II III IV I II III 2008 2009 Retail Transp & util 2010 2011 Wsale Rec & pers

-40 III IV I II III IV I II III IV I II III 2008 2009 Finance Property 2010 2011

Business

Business conditions deteriorated across all industries in the September quarter, with the exception of recreation & personal services, where conditions were a little stronger, and mining, where they were unchanged. Conditions remained strongest (by far) in mining, followed by recreation & personal services and transport & utilities, while conditions were weakest in manufacturing, retail and construction. !8%*+()!-%9:!/%+(,*!1$(*-%4#:!3(*/5!#'()(6;:!,)1-%+/#!4(&#*)6#)-!%)5!<0)%)'#!%*#!+04!011,#1!<%'0)4!(,*! 0)5,1-*;7!

Business conditions: WA strongest; Victoria weakest

Business conditions (s.a., net balance)
40 30 20 10 0 -10 -20 -30 -40 III IV I II III IV I II III IV I II III 2008 2009 Australia 2010 NSW 2011
40 30 20 10 0 -10 -20 -30 -40 III IV I II III IV I II III IV I II III 2008 2009 Australia QLD 2010 VIC 2011 40 30 20 10 0 -10 -20 -30 -40 III IV I II III IV I II III IV I II III 2008 2009 2010 SA 2011

Australia WA

Business conditions weakened across all of the mainland states in the September quarter, with the largest deterioration recorded in Victoria followed by SA and NSW. Conditions were strongest (and positive) in WA reflecting strength in mining while Victoria and SA reported the weakest conditions in the quarter.
2010q3 Business conditions NSW VIC QLD SA WA 6 12 -3 8 4 2010q4 6 3 -6 8 14 Quarterly 2011q1 2011q2 7 5 -7 -5 4 2 1 -1 0 11 Monthly 2011q3 -1 -7 -1 -4 10
2011m5 -7 0 5 -5 10 2011m6 11 2 -2 -13 9 2011m7 -1 -4 -6 14 11 2011m8 -3 -5 -4 -7 11 2011m09

7 -3 -2 -3 16

Embargoed until 11.30am Thursday 20 October 2011

Industry and state analysis (cont.)

Business confidence: mining strongest; finance & manufacturing weakest
Business confidence (s.a., net balance)
40
40

40

20

20

20

-20

-20

-20

-40 III IV I II III IV I II III IV I II III 2008 2009 Mining Constn 2010 2011 Manuf

-40 III IV I II III IV I II III IV I II III 2008 2009 Retail Transp 2010 2011

-40 III IV I II III IV I II III IV I II III 2008 2009 Finance Property 2010 2011

Wsale Rec & pers

Business

Business confidence deteriorated across all industries in the September quarter, with the largest deterioration in finance/ business/ property likely reflecting recent volatility in equity markets followed by manufacturing probably reflecting continued strain caused by the relatively high AUD. Confidence was strongest (and positive) in mining, followed by construction, where it was neither expanding nor contracting. Particularly weak confidence was recorded in finance and manufacturing. !=-%-#!-%9#1!1,'$!%1!.%;*(//!-%9!%)5!1-%6.!5,-;!()!-*%)1<#*1!(<!/%)5!%*#!-$#!+044#1-!06.#506#)-!-(!>#%/! ?1-%-#!@4#)-17

Business confidence: broad-based falls across states, again. WA strongest, Victoria weakest
Business confidence (s.a., net balance)
40 30 20 10 0 -10 -20 -30 -40 III IV I II III IV I II III IV I II III 2008 2009 Australia 2010 NSW 2011
40 30 20 10 0 -10 -20 -30 -40 III IV I II III IV I II III IV I II III 2008 2009 Australia QLD 2010 VIC 2011

40 30 20 10 0 -10 -20 -30 -40 III IV I II III IV I II III IV I II III 2008 2009 2010 SA 2011

Australia WA

Business confidence levels deteriorated across all mainland states for a second consecutive quarter. Confidence fell most significantly in Victoria, followed by WA and NSW. Consistent with a sharp deterioration, confidence was weakest in Victoria, while it was strongest in WA and Queensland (the two largest mining states).
2010q3 Business confidence NSW 8 VIC 6 QLD 6 SA 11 WA 14 2010q4 6 5 5 7 12 Quarterly 2011q1 2011q2 10 8 17 5 14 4 3 4 1 12 Monthly 2011q3 -3 -12 1 -4 4
2011m5 2011m6 2011m7 2011m8 2011m09

4 6 5 0 12

1 -4 0 -4 4

1 -2 4 -5 5

-11 -12 1 -20 6

-6 -2 3 -5 5

Embargoed until 11.30am Thursday 20 October 2011

Inflation and costs

Inflation remains subdued: retail prices edging lower
Prices (% ann, s.a.) 4
1.2 1.0 Retail prices (% p.q.) 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 02 03 04 05 06 07 08 09 10 11

0.8 0.6

0.4 0.2 0.0

-0.2 -0.4

-1 02 03 04 05 06 07 08 09 10 11

Current (LHS)

Underlying CPI (RHS)

Product price

Retail price

Product price inflation softened in the September quarter, and remained fairly subdued at a quarterly annualised rate of 0.9%. Retail prices were even more subdued, recording zero growth in the quarter, after growth of 0.3% (at an annualised rate) in the previous quarter, reflecting the current weakness in the retail sector and persistent cautiousness of consumers, which continues to weigh on domestic demand. While a little softer than underlying CPI in the June quarter, the trend in the quarterly NAB retail price series remains fairly consistent with official underlying inflation data. (Note: underlying CPI data have been adjusted using the new ABS seasonal adjustment methodology, which will be used by the ABS from September quarter 2011 onwards see here for more details.)

Labour costs pressures relatively tight, but expected to soften

Labour costs & compensation of employees (% ann, s.a.) 16 4

Expected labour costs (% ann) 4.0 3.5

12

3.0
8 2

2.5 2.0

1.5 1.0 0.5

-4 02 03 04 05 06 07 08 09 10 11

-1

0.0 02 03 04 05 06 07 08 09 10 11 12

Wages & salaries (LHS) Nxt 3 months (RHS)

Current (RHS)

Expected EBA adv 2 qtrs (n.s.a.) Exp ave gross earnings adv 2 qtrs

Labour costs

Annualised labour costs growth rose to 3.2% in the September quarter, more than offsetting the slowing in growth in the previous quarter. The stronger outcome is likely to reflect the impact of Fair Work Australias national minimum wage decision, which became effective 1 July 2011. Wage increases under EBAs are expected to average 3.3% over the next year (2.3% after allowing for productivity offsets), which is a little softer than the June quarter expectation. On average, businesses expect short-term interest rates to fall by 13 basis points (up 44 basis points last quarter). Exchange rate expectations (6-months-ahead) were unchanged at $1.04 US in the September quarter. Medium-term inflation expectations were relatively unchanged, with 28% of respondents expecting inflation to remain below 3% (unchanged from last quarter) and 62% expecting inflation of 3-4% (unchanged). Only 7% of respondents now believe that inflation is a serious problem (unchanged), while 47% (49% last quarter) believe it is a minor problem. Expected house price inflation for the coming year was revised down to -1.2% (-1.0% last quarter).

10

Macroeconomic, Industry & Markets Research

Australia Alan Oster Jacqui Brand Rob Brooker Alexandra Knight Vacant Michael Creed Dean Pearson Gerard Burg Robert De Iure Brien McDonald Tom Taylor John Sharma Tony Kelly James Glenn Group Chief Economist Personal Assistant Head of Australian Economics & Commodities Economist Australia Economist Australia & Commodities Economist Agribusiness Head of Industry Analysis Economist Industry Analysis Economist Property Economist Industry Analysis & Risk Metrics Head of International Economics Economist Sovereign Risk Economist International Economist Asia +(61 3) 8634 2927 +(61 3) 8634 2181 +(61 3) 8634 1663 +(61 3) 9208 8035 +(61 3) 8634 8602 +(61 3) 8634 3470 +(61 3) 8634 2331 +(61 3) 8634 2788 +(61 3) 8634 4611 +(61 3) 8634 3837 +(61 3) 8634 1883 +(61 3) 8634 4514 +(61 3) 9208 5049 +(61 3) 9208 8129

Global Markets Research - Wholesale Banking Peter Jolly Head of Markets Research Robert Henderson Chief Economist Markets - Australia Spiros Papadopoulos Senior Economist Markets David de Garis Senior Economist Markets New Zealand Tony Alexander Stephen Toplis Craig Ebert Doug Steel London Tom Vosa Vacant Chief Economist BNZ Head of Research, NZ Senior Economist, NZ Markets Economist, NZ Head of Market Economics - Europe Market Economist Europe Foreign Exchange +800 9295 1100 +800 842 3301 +800 64 642 222 +800 747 4615 +1 800 125 602 +(65) 338 0019

+(61 2) 9237 1406 +(61 2) 9237 1836 +(61 3) 8641 0978 +(61 3) 8641 3045 +(64 4)474 6744 +(64 4) 474 6905 +(64 4) 474 6799 +(64 4) 474 6923 +(44 20) 7710 1573 +(44 20) 7710 2910 Fixed Interest/Derivatives +(61 2) 9295 1166 +(61 3) 9277 3321 +800 64 644 464 +(44 20) 7796 4761 +1877 377 5480 +(65) 338 1789

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