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Overview

Business conditions picked back up in January after three months of easing in late 2022 – returning to a very high level at +18 index points. The rise was led by very strong trading conditions in the month, but both profitability and employment are also well above average. Interestingly, it was ‘upstream’ sectors such as wholesale, construction and manufacturing that led the improvement, though conditions also remain strong in consumer-facing retail and personal services sectors. Confidence rose back to around average, continuing to rebound from negative reads two months ago. Capacity utilisation picked up and forward orders strengthened, in line with a more optimistic outlook. Measures of cost growth also rose after easing through the second half of last year – though they remain well below their mid-2022 peaks. Price growth measures also rose. Overall, the survey suggests the economy has remained resilient to headwinds from inflation and higher interest rates. Demand has remained elevated, likely supported by strong population growth, and concerns about global growth prospects appear to have eased.

Comments from NAB Chief Economist Alan Oster

Business conditions rose 5pts to +18 index points in January, after three months of softening conditions in late 2022. All three subcomponents rose, with trading conditions up 8pts to +28 index points, profitability up 3 to +17, and employment up 2pts (unrounded) to +10.

“Business conditions picked back up in January after three months of softening in late 2022,” said NAB Chief Economist Alan Oster. “There were strong increases in conditions for ‘upstream’ sectors such as wholesale, construction and manufacturing, and importantly, conditions in the more consumer-facing industries remained very strong.”

Business confidence rose 6pts to +6 index points to be around its long-run average. The transport & utilities and wholesale industries drove the increase in confidence, with others broadly steady. Across the states, confidence rose strongly in SA, WA, Tas and Vic and is now positive in trend terms everywhere except Qld.

“Confidence dipped into negative territory late in 2022 but is now back around the average after rebounding over the past two months,” said Mr Oster. “The improvement in confidence suggest firms have a more optimistic outlook as concerns about global growth prospects ease, while strong conditions are also providing evidence that the economy is more resilient than previously expected.”

Leading indicators also edged higher. Forward orders picked up 3pts to +6 index points, with wholesale and transport & utilities leading the way. Capacity utilisation also rose to 85.7%, approaching the record highs seen in mid-2022.

“January saw an improvement in forward orders, which is another reason for business confidence to have received a boost,” said Mr Oster. “Capacity utilisation is also once again at quite a high level.”

Price and cost growth also rose in the month after easing in late 2022. Purchase costs growth picked up to 3.2% in quarterly terms (was 2.6%) while labour costs growth rose to 2.7% (was 2.1%). Output price growth edged up to 1.7% (from 1.5%) in quarterly terms, with the retail component running at 2.7% (was 2.3%).

“Measures of cost pressures rose after easing through the second half of last year,” said Mr Oster. “Importantly, survey measures of purchase cost and labour cost growth remain below their 2022 peaks and a downward trend still appears evident. That said there was a noticeable pickup in labour costs in the recreation and personal services sector.”

“Overall, the survey suggests the economy remained resilient to headwinds from inflation and higher interest rates as the year kicked off,” said Mr Oster. “From here, the pace of ongoing supply chain healing and strength of wage growth will be important in shaping how much further cost pressures ease, while the resilience of consumption will continue to be tested as higher rates are passed through to households.”

For more information, please see the NAB Monthly Business Survey (January 2023)