Business confidence falls in March, but profits, sales and employment still strong

Businesses were less confident in March due to lower levels of activity in the manufacturing, wholesale and transport industries, but confidence is still rising in certain industries and is moving up in trend terms, the latest NAB business survey reveals.

The survey also shows conditions improved during the month with gains in profitability, trading and employment, with employment index now at its strongest point since November 2007.

The construction and retail sectors also reported rising confidence.

“The bigger picture is that confidence remains at very robust levels and is still moving up in trend terms,” NAB chief economist Alan Oster said in the report.

Confidence fell three points to 16 points, but conditions rose five points to 13 with every sector reporting better conditions. Activity levels now at their strongest since January 2008 and there were particularly sharp improvements in manufacturing, retail and recreational & personal services.

Forward orders rose by four points to 10, stronger than levels recorded during late last year, and the strongest reading since July 2004.

“While 2010 appears to have started somewhat slower than late 2009, the pace of activity appears to have accelerated sharply in recent months,” Oster said.

The survey measuring capacity utilisation grew from 80.7% to 82.1%, a level Oster said is now above average.

Additionally, investment activity is picking up, with difficulty in obtaining credit decreasing slightly to six points. Respondents not requiring finance dropped from 47% in January to 40%.

Labour cost pressures increased by 1.1% on a quarterly basis, the highest reading since October 2008.

Annual wages growth increased to 1.6% in the year to March, while purchase costs moved higher to 0.5% from 0.3%.

Oster said the improvement in business conditions was unusual, “in that every sector reported significant gains – particularly in manufacturing (despite lower confidence), retail and recreational and personal services.”

He also said the strength of forecasts within the report indicates the labour market is continuing to recover, and expects to see growth in employment rise to 3% per year.

“That means even allowing for high labour force participation that the unemployment rate drops to around 4.5% by end 2010 and around 4% by end 2011.”