Declining Business Confidence in the Australian Economy is a Sign of Worse to Come

For two months now, business confidence looked to be on the rise in the Australian economy. But that uptick in sentiment hasn’t lasted. Overall business confidence fell sharply in July, according to a new NAB survey.

Once again, Australian businesses are feeling less certain about the economy’s prospects. And why wouldn’t they?

The biggest cloud hanging over business sentiment at present is the Chinese economy. Try as they might to convince you otherwise, China’s economy isn’t improving. Its outlook is worsening by the month. And it guarantees business confidence in Australia will remain weak for some time yet.

I’ll expand more on that shortly. But first it’s worth looking at the business sentiment in closer detail.

NAB’s survey shows business confidence plunged in half between June and July. It fell from +8 to +4 on its index.

At the same time, business conditions declined sharply too. Conditions refer to factors relating to the economy. It ranges from things like export orders to employment.

What did NAB’s index have to say about business conditions? They weakened between June and July, falling from +10 to +6 on the index.

All in all, it was a bad month for business sentiment.

What caused this drop then?

According to NAB, it’s down to a sharp decline in ‘trading’. In other words, the mining industry is to blame for freefalling business sentiment.

That should come as no surprise to you. The mining sector’s influence on the economy is well documented. Falling prices, and earnings, continue to weigh on the Aussie economy. But the sheer scale of the industry’s woes are revealing.

Both confidence and conditions in the troubled sector declined during July. Confidence was down 29 points for the month. At the same time, business conditions fell 18 points.

The report notes:

While confidence eased in most industries, much of the change stemmed from mining and construction firms (which includes a large share of non-residential and engineering firms), suggesting an escalation in Chinese growth concerns could be putting firms on alert’.

It’s a big downturn in sentiment compared to recent months.

In May, business sentiment was up following a favourable Federal budget. Yet this was always likely to prove a temporary lift. After all, the government can’t control external events. Even it can’t shoulder the blame for China’s recent downturn.

But there is one silver lining in business sentiment for the Australian economy. Non-mining sectors remained upbeat. NAB reports:

Looking through the month-to-month volatility, however, both conditions and confidence are suggesting a turnaround in the non-mining economy. Conditions vary greatly across industries, but the service sectors continue to outperform’.

Despite that, business confidence is trending below the long-term average.

Business confidence and the Chinese problem

China’s influence on Australian businesses is significant, to say the least. The close relationship between China’s economy and our mining sector guarantees as much. When one is flying, you can be the sure the other is too.

But that’s part of the problem too. The list of ills affecting China’s economy is getting longer. Things are unravelling at a faster clip.

Earlier in the year, released figures showed Chinese manufacturing was starting to cool.

Following that, June and July was a period of turmoil for the stock markets. Chinese investors lost trillions of dollars in the space of a month. The market panic has eased for the time being. But that’s only after authorities took desperate measures to stop the rot.

In the past week, we’ve had another two signs of China’s gradual economic decline.

Over the weekend, authorities released data showing a massive drop in Chinese trade. Total trade fell by 8.3% in the year to June.

Finally, just today the Chinese central bank took the step of devaluing the yuan by 1.9%. The weaker yuan is the latest attempt to prop up the Chinese economy. There’s a good reason why they devalued the yuan following the poor trade data. The hope is that exports will rebound as goods become cheaper to export.

It’s true that Chinese authorities still have room to soften the economy’s landing. And they’ll do exactly that. But that’s all they’re doing now: softening the blow.

I’m not saying this will result in a Chinese crash next month. I’m not saying it’ll happen this year even; or the next. But it will at some point, because that’s the path they’re set on.

What I’m getting at here is that China’s economy isn’t showing signs of improvement. In fact it’s doing the opposite; conditions are deteriorating. As long as that’s the case, Aussie businesses have every right to feel concerned.

How can we expect business sentiment to improve if China is wilting? We can’t — and that’s the truth.

Remember, business sentiment fell in July because of the mining industry. Business confidence and conditions remains rooted in the success of the mining sector. Other sectors, like services, don’t have enough heft to offset the mining industry’s gloom.

Since China dictates the success of the mining industry, it means one thing: they’ll drag us down with them.

Mat Spasic,

Contributor, Markets and Money


PS: China’s economic downturn has caused havoc on the stock markets. Over 24 million trading accounts closed in June alone. That followed a 30% decline in Chinese stock markets. If this isn’t a wakeup call that Chinese stocks are playing a zero-sum game, nothing will be. China’s economy is suffering from weak demand and low investment. That’s playing its part in driving the selloffs on Chinese markets.

The ASX has barely any exposure to Chinese stocks. But the future of the ASX might resemble what’s going on in China. Markets and Money’s Vern Gowdie says that the ASX is heading for a major correction in the very near future.

Vern is the award-winning Founder of the Gowdie Family Wealth advisory service. He’s ranked as one of Australia’s Top 50 financial planners. Not only does Vern predict a major crash, but he’s convinced the ASX could lose as much as 90% of its $1.8 trillion market cap.

Vern wants to help you avoid this coming wealth destruction. That’s why he’s written ‘Five Fatal Stocks You Must Sell Now’. As a bonus, this free report will show you which five blue chip Aussie companies could destroy your portfolio. You almost certainly own one of them. To find out how to download the report, click here.

Markets and Money offers an independent and critical perspective on the Australian and global investment markets. Slightly offbeat and far from institutional, Markets and Money delivers you straight-forward, humorous, and useful investment insights from a world wide network of analysts, contrarians, and successful investors.

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