Below trend growth to continue
Worrying signs of a slowing in activity
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Business conditions continued to ease in May with notable declines across the trading, profitability, and employment sub-components. The fall in conditions now appears to be accelerating, and while they remain a touch above their long-run average they are well below the levels we saw in early 2023. Confidence fell to -4 index points in the month and has tracked at or below 0 since February – with most industries now in negative territory. Forward orders fell sharply and if sustained will likely see a further sharp slowing in demand. This is particularly evident in the consumer sector, where forward orders in both retail and wholesale fell very sharply and are now the weakest of all industries. That said, while activity is now clearly slowing, capacity utilisation remains well above pre-pandemic levels and has shown little signs of a pullback to date. This has been reflected on the cost side where both input and output price growth continue to track at a high rate.
Business conditions fell 7pts to +8 index points in May, driven by declines across all three sub-components. Trading fell 8pts to +14 index points, employment declined 7pts to +4 index points and profitability fell 5pts to +7 index points. Conditions have eased notably since January but remain just above their long run average – reflecting the very strong starting point.
“Business conditions recorded a solid decline in May, and it appears the gradual easing we have seen through early 2023 appears to be strengthening,” said NAB Chief Economist Alan Oster. “That said, conditions remain above average reflecting just how strong the economy was through 2022.”
“All three sub-components eased in the month, suggesting that demand growth is now moderating, and trading conditions, profitability and employment are beginning to reflect this.” said Mr Oster. “By industry, the big drivers in the month were transport & utilities, wholesale and mining, which were all at very high levels previously. Retail conditions also eased but remain very solid.”
Business confidence declined 4pts to -4 index points. The decline was broad-based across industries, with the exception of mining, manufacturing and transport & utilities which saw modest improvements. In trend terms, confidence was weakest in rec & personal and retail and also negative in finance, business & property and wholesale.
Forward orders declined 6pts to -5 index points and capacity utilisation edged lower but remains high at 84.7%. Reported Capex also eased 2 points to +6 index points.
“Confidence fell back into negative territory though has bounced around within the 0 to -4 index point range in recent month,” said Mr Oster. “Our bigger worry is the sharp decline in forward orders in the month.”
According to Mr Oster, “the forward orders measure typically leads business conditions and historically has been the best measure of economic activity”. “If orders persist at these levels we could well see ongoing sharp falls in business conditions, highlighting the risks around economic growth through the middle of this year.”
Both input and output price growth ticked up in the month and remain high. Labour costs growth rose to 2.2% in quarterly equivalent terms, while input prices rose to 2.5%. Final products price growth rose to 1.3%, partially reversing the easing seen last month but encouragingly, retail price growth continued to moderate – now tracking at 1.3%.
“Our price measures ticked back up in the month and remain strong but are still some way below their peaks in mid-2022,” said Mr Oster. “The trend over coming months will be important as the RBA tries to assess whether it has done enough and if underlying inflation pressures are easing in a timely way.”
“With the easing in business conditions accelerating and forward orders falling sharply, there is a growing risk that the RBA’s attempts to maintain an even keel ‘run aground’,” said Mr Oster.
For more information, please see the NAB Monthly Business Survey (May 2023)
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