Overview

Business conditions strengthened further in September on the back of very high trading conditions and are now above their pre-COVID peak. Both the employment and profitability indexes also remain elevated. Conditions remain strong across industries and states – with wholesale and retail rising notably in the month. Capacity utilisation also remains high notwithstanding a small easing in the month. Confidence eased but remains around the long-run average. Labour and purchase costs growth continued to show the early signs of an easing from their recent peaks but remain elevated. Price growth also eased but still points to a very strong Q3 print for the underlying CPI. Overall, the survey indicates the economy has remained resilient through Q3, despite the challenges from higher inflation, rising interest rates and a gloomy global outlook. Encouragingly, the cost and price growth measures suggest the peak in inflation may be near.

Comments from NAB Chief Economist Alan Oster

Business conditions rose 3pts to +25 index points. Trading conditions drove the increase, rising by 9pts to +39 index points. Profitability and employment were little changed at +19 index points and +16 index points respectively.

“Conditions are now higher than their pre-COVID peak, which shows just how strong demand is at present,” said NAB Chief Economist Alan Oster. “The current level of conditions are only exceeded by the post-lockdown surge in early 2021. Clearly, consumers are still finding a way to keep spending, with the very strong labour market, savings buffers and a broader post-pandemic recovery all playing a role.”

“Importantly, we are seeing fairly robust conditions across sectors and across most of the states,” said Mr Oster. “While construction is still lagging a little it is well into positive territory at +11 index points in trend terms. Likewise, conditions are lagging a little in South Australia but still positive overall.”

Business confidence eased 5pts to +5 index points. Confidence fell in a number of industries including retail, wholesale, transport, recreation & personal services, and finance, business & property. Confidence was mixed across the states, with SA and Tas improving but NSW and Qld lower.

“Confidence eased in the month but is still around the long-run average in the history of the survey,” said Mr Oster. “The confidence index has been volatile recently but is clearly a little lower than it was early in the year when the passing of the Omicron wave was providing a strong reason for optimism. Still, businesses are far from pessimistic.”

“Forward indicators in the survey are very strong, further supporting the outlook,” said Mr Oster. “Forward orders are very strong at +15 index points, and capacity utilisation remains very strong. Importantly, the capex index is also very strong at +17 index points, suggesting firms are responding to strong conditions and a tight labour market by investing in their business operations.”

Costs growth eased in the month, with labour cost growth slowing to 3.1% in quarterly terms (from 3.4% in August). Purchase cost growth also eased to 3.8% (down from 4.4% in August). Overall product prices grew 2.1% and retail prices grew at 2.2% (down from 3.3% in July and August).

“There are tentative signs that cost pressures may have peaked,” said Mr Oster. “September saw the second consecutive easing in both purchase and labour costs, with the very strong July labour cost print likely an outlier driven by the increase in minimum and award wages.”

“Price growth measures also eased a little in September but we still expect a very strong Q3 CPI print given the elevated levels of costs and prices over recent months,” said Mr Oster. “We continue to expect CPI to peak in Q4.”

“Overall, the survey indicates the economy has remained resilient through recent months despite the challenges from higher inflation, rising interest rates and a gloomy global outlook, and there are signs that cost pressures may be easing. That is all good news for the economy and for businesses, at least for the time being.”

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