Below trend growth to continue
Conditions holding up as constraints tighten
Consistent with recent monthly survey outcomes, business conditions remained strong across states and industries in Q3. Business confidence also strengthened to be back above average. Capacity utilisation reached a record of 86.3% and more than 90% of firms reported availability of labour as a constraint on output, reflecting the tightness of the labour market. Around half of firms continue to also report availability of materials as a constraint. These supply-side constraints continue to be reflected in labour and purchase costs growth, which were both running at 2.1% in the quarter. Underlying wage indicators also edged higher with the forward-looking measure of expected annual wage growth per employee up to 2.1% in Q3 (from 2.0% in Q2). Wage costs remain the top issue affecting business confidence. Firms also continue to pass on these cost increases, with overall product prices growing 1.4% and retail prices growing 1.5% in the quarter.
Business conditions were broadly steady in Q3, at a strong +22 index points. Trading conditions and employment edged higher while profitability edged lower but all remain at high levels. By industry, conditions eased in manufacturing and retail but edged higher elsewhere, with conditions at fairly high levels across industries and states.
“As we have seen in the monthly business survey, conditions have really remained very strong through Q3 as demand has remained very elevated,” said NAB Chief Economist Alan Oster. “Despite headwinds from inflation and rising interest rates, so far consumers seem to be maintaining their appetite for spending.”
“Business confidence also strengthened in Q3,” said Mr Oster. “Confidence is back above average after a soft Q2 that was impacted by uncertainty around the initial rates lift-off.”
Expected business conditions in 3 months sit at +29 index points and longer-run expectations at +27 index points. Forward orders softened but remain robust at +14 index points, while capacity utilisation reached a survey-record 86.3%.
“Leading indicators remain very strong,” said Mr Oster. “Capacity utilisation is at a record level and capex plans are also very strong at +32 index points, suggesting firms are looking to expand their capacity to meet demand and help deal with the constraints they are facing.”
“Constraints appear to be increasingly binding as capacity utilisation reached a new high in Q3, with a record reading of 90% of firms reporting availability of labour as a constraint on output,” said Mr Oster.
Purchase cost growth edged higher, to 2.1%, and the share of firms reporting materials availability as a constraint remains around 50%. Labour cost growth also accelerated to 2.1%, likely reflecting minimum wage impacts as well as broader wage growth and new hiring. Final product price growth rose to 1.4%, although retail price growth edged down to 1.5% for the quarter.
“The very supply-constrained environment has seen firms continue to face upward pressure on costs,” said Mr Oster. “Importantly, firms continue to pass through higher costs to consumers with the survey’s inflation indicators rising again, reinforcing our expectation of another very strong CPI print of around 1.6% trimmed-mean for Q3.”
“Wage costs and availability of labour continue to be the top issues affecting business confidence, reflecting the very tight labour market environment that businesses are facing,” said Mr Oster. “Expected annual wage growth per employee also continues to rise, from 2.0% in Q2 to 2.1% in Q3, and we continue to expect wage growth to strengthen over the coming year.”
For more information, please see the NAB Quarterly Business Survey (Q3 2022)
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