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Overview

Business conditions edged higher in November as the post-lockdown rebound impact waned. The result was driven by a rise in the employment index as businesses re-hired staff alongside the recovery in activity, including in manufacturing and retail. However, conditions in the recreation & personal services industry – the sector most affected by lockdowns – remained in negative territory. While the easing in restrictions has come in NSW and Vic, the largest gains in conditions were actually in Qld and SA. NSW was steady while Vic improved slightly in November but failed to match the bounce seen in NSW a month prior (noting that some restrictions such as density limits remained in place until the 90% vaccination threshold was reached late in November). In terms of confidence, the aggregate index fell from the highs recorded in October but remained high across states and industries. Capacity utilisation continued to rise, reaching 83.2%, while forward orders remained elevated and capex also rose, suggesting ongoing strength in activity. The rise in employment likely contributed to an increase in labour costs growth in the month, while purchase costs growth remains high – though eased from the record highs seen in October. Output prices (including retail) edged higher suggesting that for now businesses have been able to pass on at least some of the cost pressures. Overall, the results suggest a strong recovery is continuing as reopening progresses, with activity now settling at a more ‘normal’ post-lockdown level. Conditions remain below the levels seen in early 2021 but forward indicators point to momentum continuing into 2022.

Conditions rose 2pts to +12 index points in November, remaining above the long-run average after rebounding in the prior month. The improvement in conditions was driven by employment, which rose 5pts to +11 index points. Trading conditions (up 1pt) and profitability (unchanged) were largely steady.

“Conditions continued to rise in November, although the post-lockdown bounce was less pronounced this month,” said NAB Chief Economist Alan Oster. “Much of the improvement came in Queensland and South Australia, with conditions in Victoria only lifting gradually and NSW largely steady.”

“Conditions improved noticeably in the retail and transport sectors, which were heavily impacted by the lockdowns, but deteriorated in construction,” said Mr Oster. “There is still scope for things to improve further in coming months, particularly in recreation & personal services which was still in negative territory in November despite many restrictions easing in the month.”

Business confidence eased to +12 index points in November, down from +20 a month earlier but still well above the long-run average. Confidence eased considerably in NSW, Vic, and SA after highs in October, but rebounded in Tas (after a sharp October fall there). In trend terms, confidence is strongest in NSW and Vic.

Capacity utilisation continued its recovery, reaching 83.2% in November. Forward orders remained elevated (down just 1pt to a very high +14) and capex also strengthened (up 5pts).

“Confidence remains high across states and industries, albeit it has come back to earth a little after the optimism associated with the end of lockdowns,” said Mr Oster. “Forward indicators are also very strong with a rise in capital expenditure a welcome sign that businesses are beginning to look towards a period of expansion. These results align with the strong rebound in activity that we believe is now underway, as well as a positive outlook for the coming months with vaccination rates now very high.”

Inflation indicators remain elevated. Labour costs growth continued to rise in November (partly reflecting strong employment gains) while purchase costs growth eased from record rates in the prior month. Both overall output price and retail inflation strengthened with both now well above 1% in quarterly terms.

“With employment rising rapidly, businesses’ total wage bills have naturally increased,” said Mr Oster. “As the employment recovery continues and the labour market tightens further, these gains should eventually translate into growth in underlying wages, but how quickly that occurs remains to be seen.”

“Overall, these results indicate a strong recovery is underway,” said Mr Oster. “Notwithstanding the possibility of new disruptions related to the Omicron variant, the economy is well placed to carry this momentum forward over coming months and into 2022.”

For more information, please see the NAB Monthly Business Survey (November 2021)