Why business conditions have weakened significantly recently

We ask respondents to give their views on business conditions.

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OVERVIEW

Over the course of 2018 reported business conditions in the Monthly and Quarterly Business Surveys have weakened significantly. While still above long run average readings the trend down in business conditions has been quite sharp and continuous. It has also spread to other key responses in the Survey – so for the first time since early 2016 both business confidence and forward orders have now fallen below long run average readings. We are often asked why? Rather than just speculate on possible causes we have asked respondents to give their views as to possible reasons for the weakening of business conditions.

The first question asked respondents to nominate the most likely reason(s) for this trend – choosing from a long list of possible causes. Secondly, given the widespread interest in possible flow on effects of falling house prices in Sydney and Melbourne we asked a set of specific questions on whether respondents had seen an impact from falling house prices on the demand from their customers. For the latter we used a scale (similar to that used in the past on other issues such as tax policy and wage movement) ranging from significant impacts to, moderate impact, somewhat of an impact, and nothing.

The results can be split by industry, size and by geographic region.

While there are more details below, key findings can be summarised as follows:
o Respondents rated issues such as consumer demand, high wages cost levels, margin pressure and difficulties in obtaining suitable labour as key issues. House prices and fuel costs were not rated as key issues (12th and 11th issues of importance out of a possible 17 potential problem issues).

o There were, however, some specific issues impacting particular industries more than others. That included: consumer demand in retailing; wage costs in personal and recreational services; global political uncertainties and inability to obtain suitable labour in mining; fuel prices in transport; and currency effects in wholesaling.

o Within those listing house price as a problem the highest reads were in wholesale and retail (but even there the levels of concern were relatively low).

o Of course it could be that falling customer demand (the number one ranked issue) really reflected household balance sheet constraints – and hence house prices (and possibly fuel prices as well) entered indirectly in responses. Accordingly another question specifically on the impact of falling house prices on customer demand was included.

o On the impact of house prices specifically the responses were again relatively subdued. Around 75% of respondents reported no impact. And only 9% reported a mild “somewhat” effect and around 3% a “moderate” negative impact.

o And not surprisingly those reporting “somewhat” of a negative impact from house price falls were largest in wholesaling and retailing.

o All of this is not to deny that asset prices can, if they fall far enough, have significant economic effects. Rather the key message seems to be that, so far in a good performing economy (boosted by public demand, commodity exports and better business investment) the falls in house prices are not yet sufficient to cause serious grief across the broader economy.

For more information, please see the attached report:

Special report on why business conditions have weakened