Below trend growth to continue
Conditions and confidence rise out of lockdown.
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Business conditions and confidence rose in October as lockdowns came to an end in both NSW and Victoria. Each of the trading conditions, profitability and employment subcomponents contributed to the improvement in conditions, which was driven by gains in NSW. Confidence also rose, building on the turnaround seen in September, driven by Victoria as businesses anticipated reopening at the end of the month (largely after the survey period). Retail, business, finance & property, and personal & recreation services all saw large confidence improvements. Capacity utilisation also rebounded to 81.5% and forward orders rose strongly – with both now back above average. The survey also continues to show a build-up in price pressures in the economy with the impact of elevated goods demand alongside supply chain disruptions and border restrictions pushing input cost inflation to the highest level in a decade. On the output side, products prices continue to track at a high rate, although retail price growth eased considerably. These pressures could well persist over coming months before goods demand and the labour market normalise. Overall, the results provide first indications of a strong rebound in activity as the major states emerge from lockdowns, with more improvement likely in November as Victorian restrictions continue to ease. While the demand-side is seeing a healthy rebound the supply side will likely recover more gradually, and amidst strong growth the ability of business to pass on costs will have notable implications for margins and inflationary pressure more generally.
Business conditions rose 6pts to +11 index points in October, rising back above the long-run average. All components of conditions rebounded, with trading conditions the strongest (up 7pts to +17 index points). NSW led the rebound in conditions, up 21pts, while Victoria, SA, and WA all edged lower.
“Conditions turned around in October, driven largely by the end of lockdown in NSW,” said NAB Chief Economist Alan Oster. “Conditions have held up fairly well through the lockdown period, but the resilience of businesses was beginning to wear thin in September so it is pleasing to see a quick rebound in NSW with restrictions mostly lifted.”
“Conditions improved in construction, recreation & personal services, and manufacturing, where restrictions have had a large impact,” said Mr Oster. “There is still scope for things to improve further in coming months, particularly in Victoria, but overall this is an encouraging result with conditions back above their long-run average.”
Business confidence also rose 11pts to +21 index points, led by Victoria (up 18pts) followed by Queensland and SA, while confidence fell in Tasmania. Confidence improved noticeably in retail (up 22pts), finance, property & business (up 19pts), recreation & personal services (up 10pts), mining (up 8pts) and manufacturing (up 8pts).
“Confidence began to rebound last month as reopening plans were announced, and that continued in October as businesses saw those plans begin to become a reality,” said Mr Oster. “Confidence is now back in positive territory across all states and in all industries, signalling that there is broad optimism about the way recovery is tracking now that vaccine targets are within reach and restrictions are lifting.”
Capacity utilisation recovered in October, now back to 81.5 percent. Forward orders also rebounded to +15 index points, after turning negative in September.
“The large improvement in forward orders provides further evidence of the strong rebound in economic activity that is underway,” said Mr Oster. “Businesses can see that conditions are improving and that momentum should continue over coming months.”
Inflation indicators remain elevated, with purchase cost growth reaching decade highs (2.7% on a quarterly basis) and labour costs growth also rising in October. Final product price growth was steady but retail price growth eased. “We are starting to see some price pressures, but these remain largely in the form of pressure on input costs,” said Mr Oster. “These pressures should pull back as global supply chain disruptions ease and labour markets normalise, although this process may take some time yet.”
“Overall, these results support our expectation of a strong rebound in activity as lockdowns are lifted in the final months of 2021,” said Mr Oster. “Conditions should continue to improve as vaccination rates rise and restrictions ease further.”
For more information, please see the NAB Monthly Business Survey (October 2021)
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