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Overview

Business confidence fell back into negative territory in May as conditions continued to gradually soften, suggesting the subdued economic activity seen in the Q1 GDP data has continued into Q2. Business conditions slipped just below average with trading conditions and profitability easing – though the employment sub-component improved somewhat to be back above average. There were falls in conditions across most consumer-facing sectors including retail and recreation & personal services, while forward orders remained negative overall with deep negatives in retail, wholesale and construction. Nonetheless, capacity utilisation remains above average and cost and price growth measures rose in the month – including retail price growth, which rebounded back up to 1.6% in quarterly terms. This suggests that, while growth has slowed, the process of bringing supply and demand back into balance remains incomplete, reinforcing our expectation that inflation will continue to moderate only gradually from here.

Comments from NAB Chief Economist Alan Oster

Business conditions fell 1pt to +6 index points overall, just below the long-run average. Employment rose 3pts to +5 index points, while trading conditions and profitability both fell 3pts.

“Business conditions softened a little further in May,” said NAB Chief Economist Alan Oster. “We know from the Q1 GDP data that economic activity has been very subdued for much of the past year and the survey suggests this has continued into Q2, with conditions in consumer-facing sectors the ones that are bearing the brunt as households adjust their spending behaviour.”

“That said, it is pleasing to see an improvement in the employment index this month which suggests that the labour market remains a point of strength for the economy,” said Mr Oster.

Business confidence fell 4pts (unrounded) to -3 index points. Forward orders rose 1pt to -6 index points. Capex fell 4pts to +4 index points, while capacity utilisation rose slightly to 83.3%.

“Business confidence fell back into negative territory in May, continuing a period of fairly weak business confidence,” said Mr Oster. “Forward orders also remained negative and deeply so in retail, wholesale and construction – a sign that these sectors are under pressure and certainly a potential warning sign for the outlook.”

“Despite the softening in activity, capacity utilisation remains above average which suggests the process of bringing supply and demand back into balance remains incomplete,” said Mr Oster.

Labour cost growth rose to 2.3% in quarterly equivalent terms (from 1.5% in April) and purchase cost growth also rose to 1.9% (from 1.3%). Product price growth lifted to 1.1% overall (from 0.8%). Retail price growth rose to 1.6% (from 1.0%), while recreation & personal services prices edged up slightly to 1.0% (from 0.9%).

“Cost and price growth measures appear to have re-accelerated in May,” said Mr Oster. “We have been wary for some time that the path of inflation from here is likely to be gradual and uneven, and the survey results really reinforce this message.”

“Overall, the message here is a mixed one for the RBA,” said Mr Oster. “There are warning signs on the outlook for growth but at the same time reasons to be very wary about the inflation outlook, and we expect the RBA to keep rates on hold for some time yet as they navigate through these contrasting risks.”

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