Below trend growth to continue
Confidence eases but conditions and outlook remain strong.
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Business confidence and conditions both eased in May but conditions remain strong alongside forward orders. Conditions fell 2pts as profitability and trading conditions edged down from very high levels, the employment index picked up. Overall conditions remain well above average at +16 index points. The fall in confidence was more material but still leaves confidence just above its long-run average at +6 index points. Moreover, the outlook remains positive with capacity utilisation at 85% – almost equalling the record high seen pre-Delta – and forward orders also elevated. Conditions remain strong across industries and states, with soft conditions in construction the only standout as profitability in the sector comes under increasing pressure. Overall, the May survey saw a slight easing in input cost growth following the record highs reported in April, with labour cost growth of 2.5% (down from 3.0%) and purchase cost growth at 3.8% (down from 4.5%) in quarterly terms. Still, output price inflation remains elevated with final product prices tracking at 1.8% and retail price growth jumping back up to 3.1%, in quarterly terms. As such, another strong CPI read in Q2 remains likely. Overall, the survey indicates the economy has maintained its momentum into Q2 and most businesses are in a strong position despite the inflation headwinds, with the lift-off in official interest rates and global growth risks yet to significantly impact Australia’s economic trajectory.
Business conditions eased 2pts (unrounded) to +16 index points, remaining well above average after a strong first few months of the year. Trading conditions and profitability came down slightly, but remained at high levels, while employment edged up 1pt to +12 index points.
“Business conditions really remained quite strong in May,” said NAB Group Chief Economist Alan Oster. “Across the states and in most industries we are seeing fairly strong conditions, with a pickup in transport & utilities and some normalisation in mining and recreation & personal services after unusually high April numbers.”
“The one point of concern is in construction where conditions are much softer than other sectors,” said Mr Oster. “Profitability is under increasing pressure in construction, with the survey’s profitability index into negative territory, far below what we are seeing elsewhere.”
Business confidence fell 4pts to +6 index points to, just above the long-term average. Capacity utilisation rose from 84.2% to 85% and forward orders also picked up to +12 index points.
“Lower confidence in May likely reflects a range of risks on the horizon,” said Mr Oster. “Businesses are facing a new environment of higher inflation, rising interest rates, and risks to global growth. However, confidence is still at a fairly robust level all things considered.”
“Forward indicators in the survey suggest the underlying outlook for Australia’s economy remains positive,” said Mr Oster. “Capacity utilisation is now around the record high levels seen just before the Delta outbreak in 2021, which should support investment and hiring over coming months.”
Input cost growth eased from record highs in April, with labour costs rising 2.5% (down from 3.0%) and purchase cost growth at 3.8% (down from 4.5%) in quarterly terms. Still, output price inflation remains elevated with final product prices rising 1.8% and retail price growth jumping back up to 3.1% in quarterly terms.
“There was a slight easing in cost growth in May but inflation remains a key challenge,” said Mr Oster. “Businesses continue to report elevated price inflation, and while there is little evidence so far of a major response in terms of lower demand, that remains a risk that we will be watching closely over coming months.”
“Overall, despite the slight easing in confidence and conditions, the survey results remain fairly strong and suggest the economy had maintained its growth momentum into Q2,” said Mr Oster.
For more information, please see the NAB Monthly Business Survey (May 2022)
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