Overview

Business conditions eased in Q2 as slow economic growth and soft consumer demand growth weighed on firms’ trading conditions and squeezed profitability. A range of forward-looking indicators were also soft, with confidence still negative, forward orders weakening further, and firms’ expectations for future business conditions falling. From an inflation perspective, the pace of materials cost growth is easing but capacity utilisation is still elevated and labour availability remains a significant challenge for around a third of firms, with labour cost growth unchanged at an elevated rate and wages remaining the top concern reported by firms. Nonetheless, the slowdown in demand does appear to be impacting the scope for firms to pass on cost pressures with price growth edging lower and pressure on margins a key issue for half of firms – a sign that monetary policy is working its way through the economy.

Comments from NAB Chief Economist Alan Oster

Business conditions fell 5pts to +5 index points. Trading conditions and profitability both fell 6pts while the employment index was 3pts lower (unrounded). Business confidence rose 1pt to -1 index point.

“Consistent with our monthly business survey, today’s release shows business conditions eased in Q2 as slow economic growth and soft consumer demand weighed on firms,” said NAB Chief Economist Alan Oster. “At +5, conditions are still slightly above the long-run average for the quarterly survey which dates back to 1989, but nonetheless have now come down some way from their recent highs. Confidence also remained weak.”

Expected business conditions fell at both a 3-month and 12-month horizon. Forward orders fell 4pts to -6 index points and capacity utilisation edged down to 83.6%, although capex plans remained broadly steady.

“There was further softening in the forward indicators in the business survey this quarter,” said Mr Oster. “Expectations for future business conditions have weakened, which suggests businesses are becoming more worried about the outlook for the economy even as we have so far managed to avoid a recession.”

Reported cost growth remained elevated with labour costs growing at 1.2% (unchanged) and purchase costs growing at 0.9% (down from 1.1%). Price growth measures were lower in Q2, with final product price growth running at 0.6% q/q (down from 0.8%). Retail price growth eased to 0.7% (down from 0.9%) while recreation & personal services price growth was 0.6% (down from 0.8%).

“The story on cost pressures and prices is mixed in this survey,” said Mr Oster. “There appears to be ongoing improvement in materials cost growth which is very welcome, but labour cost growth is still elevated. Labour availability was a significant constraint for 30% of firms and wage costs remain a top concern.”

“That said there has also been some gradual further easing in price growth, suggesting the slowing demand environment is putting downward pressure on firms’ ability to pass on costs to consumers,” said Mr Oster. “Pressure on margins is also now among the top issues weighing on business confidence.”

For more information, please see the NAB Quarterly Business Survey (Q2 2024)