​

Overall business confidence was relatively firm in the month, rising from an index of +3 to +4 with businesses seemingly still taking relief from the recent Reserve Bank of Australia (RBA) rate cuts as well as some abatement of concerns about Europe. Nonetheless, labour market conditions remain soft and the overall outlook for near-term activity remains moderate.

Business conditions strengthened a little in January, rising from an index reading of 0 to +2 when viewed as a whole. However, when the components of business conditions – profitability, employment and trading conditions – are analysed individually, the story appears a little different; profitability deteriorated in the month, while employment and trading conditions were unchanged.

Overall, this month’s activity readings were broadly unchanged from December but forward indicators improved so activity may strengthen a little. Credit demand also was particularly weak in the month – moving to new lows in the proportion of firms not wanting credit. Overall, the survey is consistent with underlying demand growth of around 3½% and gross domestic product (excluding coal) growth of around 3¼% in early 2012.

While a line ball decision, there may just be room for one further RBA cut in middle 2012 (May), based on tightening financial conditions (bank funding costs and a high AUD). Thereafter, we see the cash rate unchanged until middle 2013 when rates will be under upward pressure from wages and a strengthening labour market.