Monthly Business Survey: December 2021

Omicron dampens confidence, price pressures continue.

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Overview

Business confidence fell sharply in December as the spread of the Omicron variant threatened to dampen the economy’s post-lockdown momentum. The fall in business conditions was driven by the employment component, which fell despite strong jobs growth reported in official data, reflecting the complexity of the labour market situation as businesses faced growing worker shortages and the prospect of a ‘shadow lockdown’ through the summer. Still, the profitability and trading components of conditions held up in the month. In terms of confidence, the aggregate index fell sharply to be well into negative territory – below the level seen during the Delta wave – signalling the depth of concern among firms about the trajectory of the outbreak. Capacity utilisation and forward orders both fell back. Price pressures also continued in December, with both reported labour and purchase cost growth near record levels. Final products price growth also edged up from an already high rate and retail price growth printed at 2% in quarterly terms. With significant disruption to supply chains and labour markets, price pressures are to be expected and the key question will be how quickly (if at all) these pressures abate over coming months.

Business confidence fell 24pts in December, from +12 index points to -12. Confidence was down in every state, with the largest falls in NSW (down 31pts) and Vic (down 25pts), followed by Tas (down 22pts) and Qld (down 21pts). Confidence fell in all industries other than mining.

“The December survey showed a large hit to confidence from the Omicron outbreak with considerable falls right across the board,” said NAB Chief Economist Alan Oster. “The confidence index fell below the level recorded at the beginning of the Delta outbreak, showing just how concerned business are about the current virus wave.”

Business conditions fell 3pts to 8 index points. The fall in conditions was driven by the employment index, which fell 9pts to +2 index points. Profitability was up 1pt to +10 index points and trading conditions remained unchanged at +14 index points.

“Conditions eased but remained just above the long-run average in December,” said Mr Oster. “Conditions improved in a number of states including Victoria and Tasmania, but there was a large fall in Queensland that may relate to some of the challenges with state borders.”

“Looking back, conditions have been surprisingly stable through the past few months with both lockdowns and reopening having only limited effects, despite big swings in confidence,” said Mr Oster. “That should provide some comfort that businesses are continuing to find ways to adapt through difficult circumstances.”

After improving over prior months to reach 83.2% in November, capacity utilisation fell back to 80.6% in December. Forward orders were down 9pts to +4 index points and capex also edged down 1pt to +5 index points.

“The Omicron outbreak had a significant impact on leading indicators,” said Mr Oster. “That suggests that while the economy was still going ok in December, it was clearly slowing and the warning lights were coming on.”

Inflation measures remain elevated. Purchase cost growth jumped to 2.8% in quarterly terms in November, the highest level since 2008, and labour cost growth also rose to 1.9%. Final product prices were up to 1.5% and retail prices rose to 2% in quarterly terms.

“Purchase costs have lifted to near-record highs, and that pressure is flowing through to strength in output prices,” said Mr Oster. “With significant disruption to supply chains and labour markets, price pressures are to be expected and the key question will be how quickly (if at all) these pressures abate over coming months.”

“Overall, the December survey results are consistent with an economy that’s starting to slow, with some similarities to the data when NSW and Victoria were first entering lockdown,” said Mr Oster. “That probably means conditions will fall in early 2022. However, we don’t expect the Omicron variant to derail the recovery longer-term.”

For more information, please see the NAB Monthly Business Survey (December 2021)