NAB Quarterly ASX 300 Business Survey

March Quarter 2012

ASX 300 business conditions eased in Q1, but outperforming a weaker broader economy. ASX 300 tips tougher employment conditions in Q2, but optimistic on capex and capacity utilisation.

Business conditions for Australia’s larger firms eased marginally in the first quarter of 2012 – compared with a stronger pull back in the broader economy. ASX 300 firms recorded a net balance of +3 points in this survey, compared with +5 points in our December survey.

The softening in conditions was driven by sharp deteriorations in Manufacturing and (to a lesser extent) the Transport, Utilities and Communications sector. Excluding Manufacturing, conditions in the remainder of the ASX 300 improved in Q1 from +7 points to +15 points. In comparison, conditions in NAB’s Quarterly Business Survey (QBS) declined more sharply – decreasing from +6 points in Q4 to -2 points in Q1 2012 (on a non-seasonally adjusted basis).

There is a considerable divergence between the expectations of firms over the next twelve months. ASX 300 firms anticipate considerably stronger conditions in Q1 2013 – recording a net balance of +36 points, compared with +19 points in the QBS. Compared with our previous survey, the 12 month forward expectations of ASX 300 firms are marginally stronger, while expectations softened in the QBS. We note that the strength of forward expectations should always be viewed with some caution, due to a history of upside bias.

Trading and profit conditions improve for ASX 300, but employment softer.

Trends in the components of business conditions remain divergent for the ASX 300. In our March survey, the fall in the employment measure (to +1 point) was the key driver of the easing business conditions among ASX 300 firms, with this measure having been relatively strong in December. In contrast, profitability (+3 points) and trading conditions (+6 points) improved in Q1. In comparison, trends for these measures in QBS have been more uniform in performance and they deteriorated in the March quarter, with profitability declining particularly strongly. In the short term, ASX 300 firms expect a strong increase in both trading conditions and profitability, while employment conditions are tipped to deteriorate in Q2.

ASX 300 confidence declines, but remains stronger than economy.

Business confidence among ASX 300 firms and the broader economy converged slightly in the March quarter – as larger firm confidence declined, and confidence remained stable in the QBS.

ASX 300 firms recorded a net balance of +2 points (down from +5 points in our December survey). In contrast, confidence levels in the QBS remained at 0 points. There was a softening in confidence in the Mining, Manufacturing and Wholesaling industries in the ASX 300, which drove the marginal decline in our aggregate measure.

However, in contrast to the stark difference recorded in conditions in the ASX 300 excluding Manufacturing, the difference in confidence was more modest, with confidence excluding Manufacturing recording a net balance of +6 points – unchanged from our previous survey.

Business conditions: Australian economy still multi-speed; Mining and Construction outperforming, while Manufacturing is weak.

Business conditions for individual industries remain highly divergent – serving to highlight the multi-speed nature of the Australian economy.

Among ASX 300 firms, the strongest performing sectors in Q1 2012 were Construction (CON) (+40 points) and Mining (+33 points). However, we note that due to a small sample size for Construction, results for this sector have been highly volatile and should be viewed with caution.

In contrast, the weakest conditions were recorded in the Manufacturing sector, at -33 points. Other sectors to record negative conditions in the March quarter included Transport, Utilities and Communications and Wholesaling, at -7 points and -4 points respectively.

Compared with the QBS, conditions are considerably stronger than average for ASX 300 Mining, Construction (albeit with caution noted above), Retail and Finance, Finance, Business and Property Services. In contrast, conditions are weaker than the economy average for ASX 300 Manufacturing, and Transport, Utilities and Communications.

Business confidence: trending towards neutral levels for most sectors; but stronger in Mining and Transport, Utilities and Communications.

Trends in business confidence among ASX 300 firms also diverged in the March quarter, although the range between sectors remained relatively stable.

The strongest levels of confidence in Q1 were recorded in the Transport, Utilities and Communications sector – counter to the deterioration in the sector’s business conditions – and Mining – which recorded net balances of +22 points and +17 points respectively. In contrast, the weakest levels of confidence were recorded in Manufacturing, at -12 points, having declined sharply since our previous survey.

An increasing number of sectors had confidence levels near the economy average, a level that was relatively neutral in Q1 2012. These sectors included Personal and Recreational Services, Wholesaling, Retailing and Finance, Business and Property Services.

The only sectors to significantly diverge from confidence levels recorded in the QBS were Construction, and Transport, Utilities and Communications – where confidence for ASX 300 firms was considerably stronger than average – and Manufacturing, where confidence was weaker for ASX 300 firms.

ASX 300 firms faced higher labour costs and falling prices in Q1 2012.

The cost profiles of the ASX 300 firms and the QBS were highly divergent in the March quarter. Larger firms continued to report stronger increases in labour costs – at +0.7 per cent, compared with +0.4 per cent for the broader economy. In contrast, purchase costs for ASX 300 firms declined (-0.2 per cent), compared with an increase of 0.4 per cent for the QBS. Over the past year, product prices have continued to weaken for the ASX 300 – declining from +0.7 per cent to -0.2 per cent. In contrast, product prices in the QBS have remained relatively stable – between +0.1 per cent and +0.3 per cent.

In Q2 2012, ASX 300 firms anticipate a marginally larger increase in labour costs (+0.6 per cent compared with +0.4 per cent) and similar levels of product price increases – with both surveys tipping increases of around +0.2 per cent. The key difference in expectations is purchase costs, with ASX 300 firms expecting almost no increase for the quarter.

ASX 300 capital expenditure holds firm, as the rest of the economy weakens

Trends in Capacity Utilisation also diverged in our latest survey – with ASX 300 utilisation edging higher, to 85 per cent (previously 84 per cent), while utilisation in the QBS declined from 82 per cent to 80 per cent. Capital Expenditure among ASX 300 firms remained stable in Q1 2012, while it sharply pulled back for the broader economy.

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

All data non-seasonally adjusted (nsa). 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 21 November to 9 December 2011.

Previous ASX 300 Reports