Business conditions have fallen to their lowest level in 19 months, while consumer confidence has plunged following last week's quarterly GDP contraction, in further signs the economy has hit a soft patch.
NAB's monthly business conditions index dropped to +5 in November, from +7, its lowest level since April 2015, dragged down by a slowdown in corporate profits and a deterioration in the retail sector.
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Economy goes backward
GDP contracted 0.5 per cent in the September quarter. The Treasurer points the finger at weak business investment.
"While this is not a bad result, the trend is raising concerns about the direction of the non-mining recovery in the near term," NAB chief economist Alan Oster said on Tuesday.
The risks to growth were further compounded by expectations that both the housing construction cycle and commodity exports would peak in coming months, said Mr Oster, who is predicting the Reserve Bank will react to the more subdued growth outlook as well as stubbornly low inflation by cutting rates twice next year.
"We are becoming increasingly concerned about the underlying momentum in the economy as evidence mounts that the non-mining economy is losing steam," he said.
The downward trend in business conditions comes after last week's national accounts, which showed the economy shrunk 0.5 per cent in the third quarter, the first contraction in five years.
It wasn't all bad news in the NAB survey as business confidence remained relatively strong, with the monthly index edging up to +5 (from +0.4) in November.
The resilience in confidence supported Capital Economics' view that Australia is unlikely to notch up its first recession in 25 years by posting a second quarterly contraction.
"At face value, confidence is consistent with an annual rate of GDP growth of between 2.5 per cent and 3.0 per cent rather than the third quarter's 1.8 per cent," the firm's economist Paul Dales said. "As such, it is not sending a recession warning. Indeed, during significant downturns, business confidence usually falls sharply."
But last week's shock contraction in the economy does seem to have knocked consumer confidence, pulling ANZ's weekly index down by a sharp 4.4 per cent to its lowest level since May.
Business conditions fall to their lowest since April last year. Source: NAB
"It is not surprising to see a sharp fall in consumer confidence after the shockingly weak Q3 GDP result, which clearly hit confidence in the near-term economic outlook," ANZ senior economist Jo Masters said.
Ms Masters said she expected the weakness in economic growth to be temporary, pointing to the recent pick-up in retail sales.
"Moreover, higher commodity prices should support profits, and non-mining investment in NSW and Victoria is strengthening," she said.
Conditions have deteriorated sharply in the retail sector.
The RBA has in the past months been optimistic on the economic outlook, playing down the need for further easing, after cutting rates in May and August. Financial markets are still pricing in a small chance of another rate cut in the first half of 2017.
JPMorgan economist Tom Kennedy said the NAB survey indicated that the economy was running at a weaker pace than the RBA predicted.
"With business conditions now only at average levels, some further easing in monetary conditions is likely to be required to deliver the RBA's forecast 3 per cent GDP growth profile."