QTPA Member Alert | NATIONAL AUSTRALASIA BANK (NAB) UPDATE 20 August 2012 (21/8/2012)

NATIONAL AUSTRALASIA BANK (NAB) UPDATE 20 August 2012.

NAB revises up growth for 2012

Having reviewed the economy’s performance through mid-year, NAB has revised up expected growth for 2012 to now expect that the economy will grow 3.6% this year and 2.9% for 2013.

While overall growth has in part been temporarily supported in the first half by the household transfer payments as compensation for the carbon tax, the unemployment rate – probably the best pervasive guide to the economy’s performance – has not materially changed now for the best part of a year suggesting that while the economy is mixed it has held together reasonably well. Activity is expected to moderate in coming months, reflecting the government’s fiscal consolidation and a slowing in consumption growth, but another near term rate cut now appears unlikely. Underlying inflation at 2.4% in 2012 and 2.8% in 2013 (abstracting from the carbon tax) will likely see the RBA remain on hold.  We are the first to recognise that a weaker than expected growth performance and higher unemployment could yet force a rate cut by year’s end. There is also the unquantifiable risk of Europe engulfing Australia’s growth prospects through unsettled markets. But our on balance view is that we see the RBA as more likely to stay on hold until mid-2013 before two rises later that year.

NAB Survey points to some slowing in Q3

The latest NAB survey for July suggests the Australian economy has continued to grow through mid year but at a more modest pace than suggested by headline Q1 GDP and our expectation of another reasonably strong Q2 GDP result (0.9%). The survey points to underlying demand growth in the June quarter slowing to around the 3½% mark, with the July survey pointing to a further weakening in demand growth.  Business conditions weakened in July, to be trending at the lowest level in three years. The deterioration in activity reflected marked falls in the profitability and trading conditions indices, partly offset by a modest rise in employment conditions. Conditions weakened across a majority of industries, with particularly sharp declines in retail and wholesale – the industries that benefited most from the government compensation payments. Conditions fell sharply in WA but are still at strong levels, while Victoria deteriorated again.

On the employment side, we have seen continued reports of some job cuts, holding back consumer confidence. Of course, such cuts take time to be implemented, while some may involve cut backs through natural attrition. Both would, over time see lower levels of employment, but spread over a period of time. It’s an important reason to continue monitoring top-down indicators of labour demand. In the NAB Survey, the slight rise in the employment index from -4 to -1 in July continues to point to annual employment growth in the 0-1% range for the next few months. The ANZ Job Ads series through July points to a similar employment outlook. Over the year to July, employment grew by 0.6%, so right in that expected zone.

Of particular concern is the trend decline in capacity utilisation – largely reflecting rising spare capacity in the manufacturing sector – as well as relatively subdued levels of forward orders, stocks and employment conditions. Taken together, the softness in these measures implies little strengthening in near-term activity. The divergence between the weak and strong sectors remains wide and the geographic divergence may even be increasing, particularly between WA and Victoria.

Jim Vaughan

Chief Executive Officer