Q+A: Business confidence is recovering, but don't celebrate yet
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Welcome to Fear and Greed Q&A, where we ask and answer questions about business, investing, economics, politics, and more. I'm Sean Aylmer. Business confidence has improved for the third month in a row, recovering much of the slump that followed the outbreak of the Middle East conflict. But the National Australia Bank Monthly Business Survey shows confidence is still negative, business conditions remain below average, and there are signs the economy is continuing to lose momentum. Taylor Nugent is Senior Economist at NAB. Taylor, welcome to Fear and Greed Q&A.
Why does the NAB Monthly Business Survey matter to the RBA and markets?
Pleasure to be here. Tell me, why do we care so much about the NAB survey? Now, I have been covering economics for 25 years, dare I say. And in recent times, the business conditions, business sentiment, the Reserve Bank talks about it. We seem to be really focused on it. Just briefly, tell us what it does.
Yeah, so I think the great thing about the survey is it's timely compared to a lot of the official data that comes out of the Australian Bureau of Statistics and other places. And it also gives a bit of a more holistic picture because it talks about how businesses are feeling, what the confidence is, how they're seeing their conditions on the ground at the moment, but also in an environment in which supply pressures and the supply side of the economy has been so unhelpful over the past few years. It also gives some insights about where businesses are operating relative to their capacity constraints, which is really important. They're trying to measure that demand side of the economy against what that supply side can tolerate.
Yeah, so we'll get to the results in a moment. But that capacity utilisation, it seems that that data which you provide is almost the best up-to-date data on how people are thinking or businesses are thinking, be that employment, be that forward orders, that type of thing.
Yeah, that capacity realisation measure has been a very useful cross-check, if you like. The RBA is obviously very concerned about what the output gap is, where demand is relative to supply. And there's all sorts of kind of technical model-driven ways that you can try and get at this. But a very important cross-check over the last couple of years has just been this long-standing survey of businesses. What are they saying their capacity utilization is? And it's been telling a pretty believable and plausible story in terms of that tightening in capacity utilization as we saw demand growth pick up through late 2024 and through 2025, and then encouragingly some easing back over the past six months or so.
Okay, so let's talk about the latest results. Business confidence has bounced back pretty strongly really over the last three months. What's driving that recovery?
Yeah, so we saw that sharp decline in business confidence in March after the outbreak of the conflict in the Middle East. And as you say, three consecutive months of improvement since then. I think, you know, what we can say there is just kind of the assessment of how big is this shock coming from the Middle East. It's been being wound back as news on the oil price and the situation in the Middle East to turn a bit more positive. And so we've seen that kind of incrementally move back higher over the past three months or so. Although it's important to note their confidence at negative five, it's still below where it was in February, but certainly it looks like a much less remarkable drop off in confidence than what it initially looked like in March.
So Taylor, the business confidence versus business conditions, sometimes they don't seem to sink. And if you look at business conditions this time around, profitability still is in positive territory, at least. That seems a bit better. How do they work together?
Yeah, so I think, you know, the confidence measure, it tends to be more volatile, especially when you get a shock and we saw it, you know, plummet in March and then recover. Conditions has been more stable. And so I think what we've seen recently is seeing that recovery in confidence and we've seen that stabilisation in business conditions.
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