Overview

Business conditions recorded their first improvement in five months, due to gains in the employment index, but continued to ease in trend terms. Business confidence gave up some of last month’s gains and remains low as do forward orders, despite ticking up in the month. The survey continues to show that supply and demand in the economy are moving back into balance and that inflationary pressures continue to ease. Capacity utilisation continued its gradual decline, but remains above average, despite a sharp fall in the month. Final product price growth was unchanged but confirms the shift down in June – which was the lowest reading since early 2021. Purchase cost growth eased again and is not far away from its pre-COVID pace. While the labour cost index picked up, it is a total wage bill indicator and may have been impacted by the lift in the employment index as well as the rise in Award and Minimum wages in July resulting from the Fair Work Commission’s Annual Wage Review.

Comments from NAB Chief Economist Alan Oster

Business conditions rose 1pt (unrounded) to +6 index points, and are now only slightly below their long-run average. The improvement was due to a lift in the employment index (up 7 pts) with profitability unchanged and trading conditions falling 2pts.

“Business conditions improved for the first time in five months in July, but it was only a small rise and they remain below average while the trend measure again fell” said NAB Chief Economist Alan Oster. “The fall in conditions is consistent with the slowdown in growth that has occurred, but we expect the economy to grow more quickly in the second half of the year.”

“We were concerned about the sharp decline in the employment index last month, but it jumped back to an above-average level this month suggesting the robust jobs growth in the economy is continuing for now” said Mr Oster. “However, below average trading conditions and profits remain a concern.”

Business confidence fell 2pts to +1 index point with falls across all industries other than construction and recreation & personal services. In trend terms, confidence remains weakest in the goods distributions sectors -retail and wholesale trade, both of which are negative in trend terms (at -9 and -7 points respectively).

“There was a small fall in business confidence in the month, giving up some of the previous month’s gain, but it remains in positive territory even if still low by historical standards.” said Mr Oster.

Other activity indicators were mixed in July. Forward orders remained weak but showed some improvement, rising 2pts to -4 index points, while capex rose 7pts to +6 index points. In contrast, capacity utilisation had a notable fall to 82.7%, although it remains above its historical average.

“There was a sizable decline in capacity utilisation in July, and while we would caution against putting too much emphasis on a single month’s result, particularly as it was driven by a few sectors, it is also falling on a trend basis. This provides further evidence that the rebalancing in supply and demand that the RBA is looking for is occurring.”

Labour cost growth bounced to 2.5% in quarterly equivalent terms (from 1.5% in June). In contrast purchase cost growth eased to 1.1% (from 1.3%) while product price growth was unchanged at 0.7%. Of the consumer sectors, Retail price growth fell to 0.9% (from 1.3%), while recreation & personal services prices growth rose to 1.6% (from 0.6%).

“The jump in labour costs likely reflects increases in Award and Minimum wages at the start of the month and will likely fade in coming months” said Mr Oster. “Importantly, the fall in final product price growth last month was sustained and purchase cost growth again declined – both of these indicators are at a level last seen in early 2021.” said Mr Oster. “The read through into consumer prices is complicated by divergent trends at the industry level – with retail price growth easing but recreational and personal price growth picking up in July, but the broader message is that economy-wide inflationary pressures are gradually abating.”

For more information, please see the NAB Monthly Business Survey (July 2024)