Below trend growth to continue
Economy beginning to slow; inflation peak passed
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Business conditions fell by 8pts in December, notching up a third successive decline. They remain well above average at +12 index points reflecting the extraordinary strength seen in early-to-mid 2022. Notwithstanding a small improvement in confidence in the month, the larger than usual gap to conditions persisted. With confidence still in negative territory (and well below average) and forward orders moderating further in the month, there are signs that conditions may ease further. On the prices side, the survey continues to suggest notable pressure on both inputs – including labour costs – and product prices. However, all three measures continue to ease and, if that trend continues, we could well have already seen the peak in inflationary pressures in Q4. Overall, the survey continues to point to a healthy level of activity with above average conditions and elevated capacity utilisation but a slowing in momentum with most indicators pulling back over the past three months or so – in line with our expectations for a slowing as the post-COVID rebound fades and rate rises continue to flow through.
Business conditions fell 8pts to +12 index points. All three subcomponents eased, with trading conditions down by 10pts, to +18 index points, profitability down 8pts to +12 index points and employment down 5pts to +8 index points.
“After holding up relatively well in recent months, business conditions eased significantly in December with the trading conditions, profitability and employment indexes all falling,” said NAB Chief Economist Alan Oster. “The falls were significant and occurred in every sector. That said, conditions are still significantly above long run averages. As a result, the main message from the December monthly survey is that the growth momentum has slowed significantly in late 2022 while price and purchase cost pressures have probably peaked”.
Business confidence rose 3pts to -1 index points but remains well below average. Confidence rose in all industries with the exception of transport & utilities. By state, there was an improvement in WA, NSW and Vic while QLD edged higher and Tas was flat. SA recorded a decline in the month.
“After turning negative last month, confidence remained well below average and just into negative territory despite a small improvement in the month,” said Mr Oster. “The gap between current business conditions and business confidence remains wider than usual though has narrowed. Ultimately while on average business reports still healthy activity at present, they don’t necessarily expect that to last.”
Leading indicators were slightly softer with forward orders edging down 2pts to +3 index points, and capacity utilisation also eased. Forward orders pulled back across all industries with the exception of mining and retail.
“Forward orders have softened over recent months, likely reflecting a cooling in demand, while any backlogs are being worked through.” said Mr Oster. “Of note is that forward orders for retail and wholesale are now in negative territory suggesting the goods sector is beginning to cool after a very strong year.” said Mr Oster.
Output price and input cost growth measures eased in the month but remain elevated. On the inputs side, labour cost growth slowed to 2.0% in quarterly terms and purchase costs growth eased to 2.5%. On the output side, final products price growth slowed to 1.5%, while the retail component slowed to 2.3%.
“Encouragingly costs growth slowed in the month and appears to have peaked around the middle of 2022,” said Mr Oster. “But cost pressures still remain elevated as do output prices and would need to slow further to see inflation ease back to the RBA’s target band.”
“Overall, the survey continues to reflect the broad trends we see in the economy,” said Mr Oster. “Momentum is clearly slowing though activity remains solid. Price pressures are still evident but are easing as supply chains, freight costs and fuel input prices ease”.
“That said, we know the full impact of rates is yet to fully flow through so the survey should give us an indication of the accelerating impact from rates over coming months,” said Mr Oster.
For more information, please see the NAB Monthly Business Survey (December 2022)
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