Cameron Spencer/Getty Images for Red Bull Air Race ANZ expects a modest and elongated price downturn ahead.

Australian business conditions, as measured by the NAB, have weakened sharply in recent months.

The only times larger falls have been recorded was back in 2000 and 2008 — two periods when Australian economic growth slowed sharply.

The rebound in business conditions on those occasions was helped by easier monetary policy settings from the RBA.

Financial markets expect a similar policy response from the RBA on this occasion, deeming a rate cut by the end of the year as a certainty.

As a barometer on how the Australian economy is performing right now, there are few better indicators out there than the National Australia Bank’s business survey.

It’s not only more timely than GDP and other lagging economic indicators such as the unemployment rate, but it also contains information on how businesses are feeling and what they’re seeing in their day-to-day activities.

As things currently stand, the news is mixed on how the economy is performing.

On one hand, business conditions — an aggregate measure of trading conditions, profitability and employment expectations — currently sits around the average level seen since the NAB survey began in the late 1990s.

On the other, business confidence is weak, sitting at below-trend levels.

While a mixed picture on what businesses are experiencing right now, both conditions and confidence have fallen quite sharply in recent months, especially the former, increasing concern that the economy has lost a considerable amount of momentum.

This chart from Westpac Bank explains why those growth concerns are elevated.

Westpac Bank

It shows the six-month change in business conditions in the NAB survey since 2000.

Only on two other occasions — 2000 and 2008 — has the six-month decline in business conditions been sharper.

For those who’ve been watching the economy over that period, they’ll recall that on both occasions, economic growth slowed sharply.

As Andrew Hanlan, Senior Economist at Westpac Bank notes, the decline in business conditions seen on this occasion fits with a broad weakening in many domestic economic indicators, especially for consumers and housing, along with a deceleration in the global economy.

“The slowing of the Australian economy is centred on housing and the consumer,” Hanlan says.

“Retail sales all but stalled over the second half of 2018, as weak wages growth, high debt levels and falling house prices impacted.

“Dwelling approvals collapsed late in 2018 as the housing downturn gathered pace after lending conditions were tightened further.

“The global economy also lost momentum during 2018 with trade slowing and uncertainty increasing.”

As the chart from Westpac shows, business conditions rebounded strongly in 2000 and 2008, helped by easier monetary settings both from the RBA and other major central banks.

Given clear signs the Australian economy has lost some momentum over recent months, it goes someway to explaining why financial markets now see a rate cut from the RBA by the end of the year as a certainty, with the risk of a second cut also starting to be priced in.

While Westpac isn’t forecasting rate cuts from the RBA, seeing the cash rate remain unchanged until at least 2021, it expects Australian GDP will grow by only 2.6% this year and next, below the 3% and 2.75% levels forecast by the RBA.

NOW READ: Business conditions stabilise but NAB is now ready to say the RBA could cut rates

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