Embargoed until: 11.

30am Tuesday 11 October 2011

Monthly Business Survey

September 2011

Conditions recover and businesses take comfort from better sales, a lower AUD and talk of interest rate cuts. Global uncertainty still weighing on near-term activity indicators.
Business conditions improved in September, after edging down over the previous two months, with the outcome suggesting that the Australian economy may be stabilising. However, there are still signs that a swift recovery may not ensue, with forward orders remaining weak and stocks contracting a little in the month. Nonetheless, capacity utilisation bounced back, to be above long-run average levels. Overall, the Surveys activity readings, if maintained at current levels, are broadly consistent with underlying demand growth of around 3% in the December quarter (at an annualised rate) and GDP growth (ex coal) of 3%. ! Business confidence rebounded sharply in September, in line with better conditions and helped by the sharp depreciation of the AUD coupled with speculation that domestic interest rates will be reduced. Confidence rose across a majority of industries in the month, with a particularly strong rise in manufacturing implying that the lower AUD provided some relief. ! Conditions improved in all industries other than personal & recreational services which was unchanged at strong levels. During September there were large gains in manufacturing and mining conditions. Despite this, conditions remain at depressed levels in manufacturing, construction, retail and wholesale. ! Labour costs growth eased a little in the month, after solid outcomes in the previous two months. Final product prices softened in September, and retail price growth was also weaker. Implications for NAB forecasts (See Global & Australian Forecasts report also released today): ! The survey results signal caution about the likelihood of monetary policy being loosened in the near term, although the odds of a rate cut are clearly higher following the slowing in global growth and financial market volatility. Our domestic forecasts are broadly unchanged. ! While near term activity remains soft, we see a medium-term rebound in the Australian economy, aided by mining exports and investment in resources and infrastructure. We expect GDP growth of 1.9% in 2011, rising to 4.1% in 2012. Core inflation (ex carbon pricing) is expected to remain around 2% over the next year but drift above 3% by mid-2013. As such, we expect the RBA will need to lift rates by late 2012. However, in the near term, the RBA is more dovish and there is now a 50/50 chance of a reduction in the cash rate in coming months if inflation remains subdued and domestic demand and the labour market weakens further. ! Key monthly business statistics*
Jul Aug 2011 2011 Net balance Business confidence Business conditions Trading Profitability Labour costs Purchase costs Final products prices Sep 2011 Employment Forward orders Stocks Exports Retail prices Capacity utilisation rate Jul Aug 2011 2011 Net balance -2 0 -6 -5 3 2 1 -3 % change at quarterly -0.7 0.2 Per cent 80.4 80.4 Sep 2011 3 -4 -1 -2 rate 0.1 81.3

1 -9 -2 -1 -3 2 1 -3 5 -3 -6 -2 % change at quarterly rate 2.1 1.3 1.0 0.8 0.8 0.6 0.5 0.4 0.2

* All data seasonally adjusted and subject to revision. Cost and prices data are monthly 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 26 to 30 September, covering over 400 firms across the non-farm business sector.

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

Next release: 20 October 2011 (September Quarterly)

Embargoed until 11.30am Tuesday, 11 October 2011

Analysis
The business conditions index recovered Conditions strengthen by a solid 5 points in September, lifting out Business conditions (net balance) of negative territory to +2 index points and 20 unwinding consecutive declines recorded in the previous two months. While overall 10 conditions remained fairly soft in 0 September, the pick up in activity implies a shift in momentum towards a more -10 expansionary economy, compared to an economy that had previously appeared to -20 be losing traction. The improvement in conditions in the month reflected broad-30 based increases in trading conditions (up -40 8 to +5 points), profitability (up 4 to III IV I II III IV I II III IV I II III -2 points) and employment (up 3 to 2008 2009 2010 2011 +3 points). Seasonally adjusted Trend The conditions index, at +2 points, is now Conds 1990s recn 4 points below its long-term average of Average of the indexes of trading conditions, profitability and +6 points (since 1997 for the Monthly employment. Survey). However, if the Survey comparison Confidence bounces back is extended back to the timeframe of the full Business confidence (net bal., s.a.) Quarterly Survey (1989), conditions are in 20 fact a touch above the long-run average of +1 point. 10 Business confidence recovered sharply in September (up 7 points to -2 index points), 0 although the outcome still implies negative -10 confidence readings in both seasonally adjusted and trend terms. Nonetheless, the -20 pick up in business confidence is a much better outcome than what could have been -30 envisaged given the heightened uncertainty and volatility enveloping the global economy -40 III IV I II III IV I II III IV I II III at present. As such, the turnaround in 2008 2009 2010 2011 confidence relative to a month ago suggests less concern about the impact of global Seasonally adjusted Trend Conf 1990s recn influences on activity within business. Furthermore, the depreciation of the Australian dollar during the month is likely to Excluding normal seasonal changes, how do you expect the have helped to alleviate some stress on business conditions facing your industry in the next month to change? businesses competing on the global market, while the heightened expectation that domestic interest rates will be lowered by the RBA may have also provided some relief. The current level of business confidence remains below the average of the series (of +6 for both the Monthly and Quarterly timeframe). Business conditions by industry. Business conditions improved across all industries, with the exception of recreation & personal services, where they were unchanged. Conditions improved very strongly in manufacturing although they remained weak while conditions also improved notably in mining. Overall, business conditions were strongest (by far) in mining (+28), recreation & personal services and transport & utilities, while conditions were again weakest in manufacturing, construction, wholesale and retail. Business conditions by state. Conditions improved across all states in September, with conditions rising very sharply in Tasmania (on a small sample) and also improving solidly in NSW. In level terms WA, Tasmania and NSW all reported positive readings for business conditions in the month, while conditions continued to contract in Queensland, Victoria and SA. In trend terms, WA remained the strongest state followed by NSW and SA. In contrast, trend conditions were weakest in Tasmania followed by Victoria and Queensland.

Embargoed until 11.30am Tuesday, 11 October 2011

Analysis (cont.)
Business confidence by industry. Business confidence improved across all industries in September, with the exception of construction, mining and wholesale. The largest pick up in confidence was in manufacturing, followed by finance/ property/ business, transport & utilities and retail. In level terms, confidence remains positive in mining and retail (with confidence levels of +16 and +3 respectively), is neutral in recreation & personal services, and falling in all other industries. The weakest confidence was in wholesale (-13), followed by construction (-9). Business confidence by state. Business confidence picked up across all states in September with the exception of WA where it was marginally lower. Trend confidence levels were again strongest in WA and Queensland (the largest mining states), and were weakest in Tasmania (despite confidence picking up very sharply in the month; on a small sample) and SA. The variation in business conditions across sectors has become increasingly pronounced since late 2009. 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). The persistent divergence in industry conditions indicates that the Australian economy is undergoing a structural transformation towards mining and servicebased industries, and away from traditional manufacturing and discretionary retailing.

Economy remaking itself

Business conditions
Net bal.

3-month moving average 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

The forward orders index rose marginally in September, although remained fairly subdued (-4 points) and below its long-term average level (of +1 over the Monthly Survey period and -1 over the Quarterly Survey period). Changes in forward orders indices in September were mixed across industries. In levels terms, orders were strongest (and positive) in finance/ business/ property (+8), and weakest in mining (-11), wholesale and manufacturing. Capacity utilisation picked up in September, rising to 81.3% from 80.4% in the previous month, to be above its long-term average (of 81.2% over the Monthly Survey period or 80.4% over the timeframe of the full Quarterly Survey). Notably, capacity jumped sharply in finance/ business/ property and manufacturing more than unwinding last months sharp declines and in mining and personal & recreational services. Despite stronger readings elsewhere in the survey, capacity utilisation fell in retail and construction. Capacity utilisation remained highest in mining and lowest in manufacturing. Capital expenditure was lower in September (+1 point), reflecting weaker investment in transport & utilities and construction. Forward orders implied softer 6-monthly annualised demand growth for the June quarter 2011 than the 4.3% outcome in the June quarter National Accounts. Based on forward orders for the September quarter, the survey implies 6-monthly annualised demand growth was around 2% in the September quarter. If we assume the September forward orders outcome is continued into the December quarter, the Survey implies 6-monthly annualised demand growth will rise to around 3%.

Demand growth to stabilise

Forward orders (change & level) as an indicator of domestic demand (6-monthly annualised) 10 8 6 4 2 0 -2 -4 02 03 04 05 06 07 08 09 10 11

Domestic demand

Prediction from orders

Embargoed until 11.30am Tuesday, 11 October 2011

Analysis (cont.)
Similarly, business conditions imply that 6-monthly annualised GDP growth was (significantly) higher than the 0.6% recorded in the June quarter. This largely reflects the survey not capturing the full impact of the flood-induced decline in coal mine production in H1 2011 (which has taken the best part of 1% off H1 GDP). Based on business conditions for the September quarter, the implied 6-monthly annualised GDP growth (ex coal mines) would be around 2-2% (annualised) in the September quarter. But if September monthly business conditions were maintained over the December quarter, the implied growth rate would rise to around 3%. Elsewhere in the survey, cash flow was strongest in mining and weakest in construction and retail.

GDP (ex coal mines) growth to pick up

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

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

GDP

Prediction from bus conds

Labour costs (a wages bill measure) softened to 1.0% in September (at a quarterly rate), following increases of 1.3% in the previous month. It appears that the boost provided to growth by Fair Work Australias minimum wage increase in July has begun to dissipate. Labour cost increases in the month (at a quarterly rate) were highest in transport & utilities (1.9%) and mining (1.2%), while growth was softest in wholesale (0.3%), construction and retail (both 0.8). Price inflation softened in September, increasing by 0.2% (at a quarterly rate), compared to growth of 0.4% in August. Retail prices were even more subdued, increasing by a quarterly rate of just 0.1% in the month, from a soft 0.2% in the previous month. The softer increase in retail price growth reflected a 0.1 percentage point decline in retail purchase cost inflation, suggesting that retailers continued to keep their margins relatively stable. Overall purchase cost pressures appear to have eased in September, despite the depreciation of the AUD over the month (these cost increases may be expected to flow through in coming months). Purchase costs increased by 0.6% in the month (at a quarterly rate), following growth of 0.8% in August. By industry, the only industry to experience an increase in purchase cost pressures in the month was wholesale, while purchase costs softened in construction and recreation & personal services.

Retail prices soften

Costs & prices (% change at a quarterly rate)
2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 III IV 2008 I II III IV I II III IV I II 2011 Retail price III 2009 Labour 2010 Product price

Based on respondent estimates of changes in labour costs and product. Retail prices are based on retail sector product price estimates.

Embargoed until 11.30am Tuesday, 11 October 2011

Current business conditions

Business conditions
The business conditions index picked up solidly in September, rising by 5 points to +2 index points, although remained a little below its long-term average of +6 points for the Monthly Survey (but in line with +1 points for the Quarterly). In trend terms, the conditions index was unchanged at -1 index points.
20 10 0 -10 -20 -30 -40 III IV 2008 Trading I II III IV I II III IV I II 2011 Employment III 2009 2010 Profitability

Conditions recover
All components of business conditions (net bal., s.a.)

Trading, profitability and employment

The rise in the business conditions index in September reflected improvements in trading conditions, profitability and employment. Compared with their long-run averages over the Quarterly Survey period (from 1989), trading conditions were marginally softer than average, profitability was the same and employment conditions were stronger than average.

Trading conditions improved very strongly in Conds 1990s recn manufacturing (up 29 to -5 points), more than unwinding a sharp deterioration in the previous month, while conditions also improved solidly in transport & Net balance of respondents who regard last months utilities, wholesale and construction. In contrast, trading / profitability / employment performance as recreation & personal services recorded a decline in good. trading conditions, albeit conditions remained strong (down 3 to +16). In trend terms, trading conditions remained strongest in mining (+27) and recreation & personal (+17), while conditions were weakest in manufacturing (-17) and retail (-10). Profitability improved strongly in mining (up 13 to +21 points) and transport & utilities (up 13 to +18 points), while it fell notably in wholesale. In trend terms, profitability was strongest in mining (+18) and recreation & personal services (+12), and weakest in manufacturing (-18), retail (-12), construction (-11) and wholesale (-9). Employment conditions picked up to +3 index points in September, which was the second consecutive monthly increase. The improvement in employment in the month was most significant in manufacturing (up 18 to -6 points) followed by wholesale (up 7) and mining (up 6). In contrast, employment conditions declined very sharply in transport & utilities (down 28 to +1 index points), while conditions also weakened in construction (down 6) and recreation & personal services (down 1). Trend employment conditions were strongest in mining (+33), and weakest (negative) in manufacturing (-18) and wholesale (-5). Business conditions components (net balance)
Trading performance
20 20

Profitability
20

Employment

10

10

10

-10

-10

-10

-20

-20

-20

-30 III IV 2009 I II III IV I II 2011 Trend III 2010 Seasonally adjusted

-30 III IV 2009 I II III IV I II 2011 Trend III 2010 Seasonally adjusted

-30 III IV 2009 I II III IV I II 2011 Trend III 2010 Seasonally adjusted

Net balance of respondents reporting trading performance / profitability / employment as good or very good (rather than poor or very poor).

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Current business conditions (cont.)

Forward orders
The forward orders index continued to nudge higher in September, though remained fairly subdued (up 1 to -4 points), and was unchanged at -5 points in trend terms. Changes in forward orders were mixed across industries. New orders deteriorated sharply in mining (down 28 to -11 points), followed by transport & utilities and recreation & personal services. In contrast, orders improved across all other industries, with the most notable increases in manufacturing (up 13) and finance/ business/ property (up 12). In seasonally adjusted terms, orders were strongest (and positive) in recreation & personal services (+8), and weakest in mining (-11) and wholesale (-8).
Net balance of respondents with more orders from customers last month.
20 10 0 -10 -20 -30 -40 III IV 2008 I II III IV I II III IV I II 2011 Trend III 2009 2010

Orders remain weak

Forward orders (net balance)

Seasonally adjusted Orders 1990s recn

Capacity utilisation
Capacity utilisation rebounded in September, increasing by 0.9 percentage points to be above average, at 81.3%. The rise in utilised capacity largely reflected increases in finance/ business/ property and manufacturing, while retail and construction experienced a reduction in capacity utilisation. Despite a pick up in capacity utilisation in the month, trend capacity was marginally lower, falling by 0.1 percentage points to 80.7%. In levels terms, trend capacity utilisation was highest in mining (84.5%) and recreation & personal services (83.2%), and lowest in manufacturing (74.6%).
Full capacity is the maximum desirable level of output using existing capital equipment.

Capacity utilisation rebounds

Capacity utilisation (per cent)
86

84

82

80

78

76 III IV 2008 I II III IV I II III IV I II 2011 Trend III

2009

2010

Seasonally adjusted CapU 1990s recn

Stocks
The stocks index continued its decline in September, falling by 3 points to -1 index point. The stocks index, which is now in negative territory, implies some expectation of a deterioration in future demand (albeit soft), which is consistent with a contraction in forward orders. Changes in stocks in the month were mixed across industries. The stocks index fell sharply in mining (down 14 to -11 points) and manufacturing (down 8). On the other hand, stocks rose notably in retail (up 8 to +13 points) and construction (up 5). In trend terms, the stocks index was highest in retail (+6) and transport & utilities (+4) and lowest in construction (-7) and manufacturing (0).
Net balance of respondents with an increase in stocks last month.
10 5 0 -5 -10 -15 -20 III IV 2008 I

Stocks contract
Stocks (net balance)

II

III

IV

II

III

IV

II 2011

III

2009

2010 Trend

Seasonally adjusted

Embargoed until 11.30am Tuesday, 11 October 2011

Current business conditions (cont.)

Capital expenditure
Capital expenditure fell in September (down 4 to +1 point), after edging higher in the previous month, and it also eased in trend terms. Capital spending was higher in mining and manufacturing, but lower in all other industries. The largest declines in capex were in transport & utilities, construction, finance/ business/ property and wholesale. In level terms, apital expenditure was lowest in construction (-7) and wholesale (-6) and highest in mining (+25).
20

Capital spending weakens

Capital expenditure (net balance)

10

-10

-20

Net balance of respondents with an increase in capital expenditure last month.

-30 III IV 2009 I II 2010 Seasonally adjusted III IV I II 2011 Trend III

Exports
The exports index, which represents export conditions for the economy as a whole, rose marginally in September to -2 index points, after falling heavily in August. By industry, the exports index rose most in manufacturing and wholesale, while it fell heavily in transport & utilities and finance/ business/ property. Similarly, the exporters sales index, which represents export conditions for exporting industries, also rose in the month, but by a larger amount (up 5 to -9 points).
2 0 -2 -4

Exports up, but still weak

Exports (net balance)

-6 -8 -10 III IV 2008 I II III IV I II III IV I II 2011 Trend III 2009 2010

Seasonally adjusted

Net balance of respondents with an increase in export sales last month.

Credit availability
Firms reported no change in difficulty obtaining finance in September, with the net index (easier minus harder) remaining at -6 index points. This outcome reflected a fall in the proportion of respondents finding it more difficult to obtain finance, which was entirely offset by a fall in the proportion of firms finding it easier to obtain finance. The proportion of businesses reporting that they did not require credit rose from 42% to 44%, suggesting slightly less credit demand.
100

Credit conditions unchanged

Borrowing conditions (% of firms)

80

60

40

20

0 II III 2010 More difficult Unchanged Easier IV I II 2011 No borrowing required III

In terms of the borrowings required for your business in the last month, has it been

Embargoed until 11.30am Tuesday, 11 October 2011

Industry sectors
Business confidence Mining strongest; wholesale and construction weakest

Most industries reported an improvement in business confidence (seasonally adjusted) in September. The exceptions to this were construction, where confidence fell sharply (down 12 to -9 points), and mining and wholesale, where confidence levels were marginally lower. Confidence improved most significantly in manufacturing (up 15 to -2 points), followed by finance/ business/ property, transport & utilities and retail. In level terms, seasonally adjusted confidence was strongest in mining (+16) and weakest in wholesale (-13) and construction (-9). Trend confidence levels were strongest in mining (+19) and weakest in manufacturing and wholesale (both -9). Business confidence by industry (net balance) 3-month moving average
40 30 20 10 0 -10 -20 -30 -40 III IV 2009 Mining I II III IV I II 2011 Manuf Constn III 2010 40 30 20 10 0 -10 -20 -30 -40 III IV 2009 Retail I II III IV I II 2011 Wsale Transp III 2010 40 30 20 10 0 -10 -20 -30 -40 III IV 2009 I II III IV I II 2011 Rec, pers III 2010 Fin, bus, prop

Business conditions

Mining strongest; manufacturing weakest

Business conditions (seasonally adjusted) improved across all industries in September, with the exception of recreation & personal services where conditions were unchanged. The most significant increases in conditions were in manufacturing (up 19 to -8 points) and mining (up 11 to +28 points), more than unwinding falls in the previous month. In seasonally adjusted terms, the strongest conditions were in mining (+28), recreation & personal services (+13) and transport & utilities (+12), while conditions were weakest in manufacturing (-8), construction, wholesale and retail (all -5). Trend conditions were strongest in mining (+24) and weakest in manufacturing (-17). Business conditions by industry (net balance) 3-month moving average
40 30 20 10 0 -10 -20 -30 -40 III IV 2009 Mining I II III IV I II 2011 Manuf Constn III 2010 40 30 20 10 0 -10 -20 -30 -40 III IV 2009 Retail I II III IV I II 2011 Wsale Transp III 2010 40 30 20 10 0 -10 -20 -30 -40 III IV 2009 I II III IV I II 2011 Rec, pers III 2010 Fin, bus, prop

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States
Business confidence Confidence rebounds in Tas and Vic: Weakest in SA

Business confidence (seasonally adjusted) improved across all states in September, with the exception of WA, where confidence levels were marginally lower. The most significant increases in confidence were in Tasmania (up 46 to +9 points; on a small sample) and Victoria (up 10 to -2 points). Trend confidence remained highest in WA (+5; despite confidence edging lower in the month), followed by Queensland (+3), while levels were lowest in Tasmania (-14) and SA (-10). Business confidence by state (net balance) 3-month moving average
40 30 20 10 0 -10 -20 -30 -40 III IV 2009 I II III IV I II 2011 NSW VIC III 2010 Australia 40 30 20 10 0 -10 -20 -30 -40 III IV 2009 I II III IV I II 2011 QLD WA III 2010 Australia 40 30 20 10 0 -10 -20 -30 -40 III IV 2009 I II III IV I II 2011 SA TAS III 2010 Australia

Business conditions

WA strongest; Vic and Qld weakest

Business conditions (seasonally adjusted) improved across all states in September, with the largest increases recorded in Tasmania (up 33 to +15 points; on a small sample) and NSW (up 10 to +7points). Trend conditions were highest in WA (+13) followed by NSW and SA (both +1), and were lowest in Tasmania reflecting a lengthy prior period of weak conditions (-9), Victoria and Queensland (both -4). Business conditions by state (net balance) 3-month moving average
40 30 20 10 0 -10 -20 -30 -40 III IV 2009 I II III IV I II 2011 NSW VIC III 2010 Australia 40 30 20 10 0 -10 -20 -30 -40 III IV 2009 I II III IV I II 2011 QLD WA III 2010 Australia 40 30 20 10 0 -10 -20 -30 -40 III IV 2009 I II III IV I II 2011 SA TAS III 2010 Australia

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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