NAB’s Chief Economist, Alan Oster provides his thoughts on the Australian and Global economy.
Conditions deteriorate as Omicron peaks.
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Business conditions deteriorated in January as the Omicron variant caused COVID-19 cases to reach unprecedented levels, triggering consumer caution and staff shortages. Profitability, trading conditions, and employment all fell, with the impact felt across almost all states and industries. Recreation & personal services continues to be hardest hit but retail, transport, and construction all saw large negative impacts. Nonetheless, business confidence rebounded to positive territory after the initial outbreak caused a sharp fall in confidence in December. The confidence rebound signals that, despite the disruption, firms were optimistic that the outbreak would be short-lived, and consistent with this, forward orders remained steady. There was also a rise in capacity utilisation, driven by manufacturing, transport, and wholesale. Cost pressures remained elevated, with purchase cost growth reaching a record 3.4% in quarterly terms. Strong wage bill growth continued while on the output side, final product price inflation remained elevated, although retail price inflation eased somewhat. With case numbers appearing to have peaked in late January, some staffing constraints should ease and conditions should improve in in the coming months, but uncertainty remains about how quickly wider supply chain issues will be resolved.
Business conditions fell 5pts in January, to +3 index points, declining below their long-run average. All three components of conditions deteriorated, with large falls in profitability (down 8pts to +2 index points) and trading conditions (down 7pts to +7). Employment also fell (down 3pts to -1).
“The Omicron outbreak has caused significant disruption, and that is reflected in a deterioration in business conditions to start the year,” said NAB Group Chief Economist Alan Oster. “The recreation & personal services sector remains hardest-hit, and several other sectors saw large impacts.”
“Still, conditions have remained in positive territory and are nowhere near as bad as we saw during lockdowns imposed in 2020 and 2021,” said Mr Oster. “While consumers have been cautious, vaccines have provided protection and businesses have also learned to adapt the way they operate through past virus waves.”
Business confidence rebounded 15pts in January to +3 index points after falling to -12 in December. Confidence rose across all industries outside mining, and across all states. Forward orders were steady at +4 index points, while capital expenditure edged down 3pts to +3. Capacity utilisation rose from 80.7% to 81.6%.
“Confidence fell sharply in December as the Omicron variant began to spread, but rebounded in January, reflecting that the outbreak looks to have peaked quickly and lockdowns have been avoided,” said Mr Oster. “That positive outlook is underpinned by forward orders, which held steady through January despite the disruption.”
“Capacity utilisation also rose in the month, driven by manufacturing, transport, and wholesale,” said Mr Oster.
Inflationary pressures have persisted. In quarterly terms, purchase cost growth rose to a record 3.4% in January, while labour cost growth remained elevated at 1.9%. Final product prices also remained elevated, but retail price inflation eased somewhat, from 2.0% to 1.3% in quarterly terms.
“Purchase costs growth kept rising in January, reaching record highs in quarterly terms, reflecting ongoing challenges in the supply chain,” said Mr Oster. “Retail price growth eased somewhat, but it is nonetheless clear that the economy is facing a period of elevated inflation while supply chain issues remain unresolved.”
“Overall, the January survey shows significant disruption to business activity from the spread of the Omicron variant, albeit impacts on businesses were less severe than in past outbreaks,” said Mr Oster. “However, we continue to expect a strong recovery as case numbers come down.”
For more information, please see the NAB Monthly Business Survey (January 2022)
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