Australia business conditions stay elevated in May: National Australia Bank

[SYDNEY] Australian firms reported a notable improvement in sales and profitability last month, highlighting an ongoing recovery in the non-mining sectors of the economy that supports the case for the central bank to hold off on any cuts in interest rates.

National Australia Bank's monthly survey of more than 500 firms showed its index of business conditions held steady at +10 in May, above the long-run average.

Its business confidence index slipped two points to +3, perhaps reflecting uncertainty over the July 2 general election.

"Services continue to lead the way... while manufacturing has pulled back and mining (and related sectors) still look weak," said NAB chief economist Alan Oster.

"Overall, this outcome suggests that economic activity is holding up reasonably well, with the RBA more focussed on the inflation outlook - encouragingly, inflation indicators in the Survey picked up a little this month."

Growth in purchase costs were up in the month to 0.7 per cent at a quarterly rate, from 0.3 per cent, while final product prices growth quickened slightly to 0.3 per cent, from 0.1 per cent.

The Reserve Bank of Australia (RBA) kept interest rates steady at a record low 1.75 per cent this month, pausing after cutting in May on disturbingly low inflation. Debt futures imply one more quarter-point cut by year-end.

"But without a very weak CPI result for Q2 and/or a markedly higher AUD, non-mining activity strength, together with financial stability concerns of even lower rates, are, on balance more likely to keep the RBA on hold," Mr Oster added.

The survey's index of sales rose five points to +20, while the measure for profits climbed three points to +12.

Slightly disappointing, the employment index dipped to +1, from +4, and was back at subdued levels consistent with more moderate employment growth.

REUTERS