Business confidence hit as inflation, interest rate pressure builds: NAB

Local business confidence dropped to below-average levels in June, amid global economic uncertainty, plus rising interest rates and inflation, according to NAB.

Consumer and business confidence has fallen as inflation and looming rate hikes continue to cloud the economic outlook, even though business conditions and forward orders remain strong, NAB’s Monthly Business Survey shows.

Business conditions are still well above average levels despite a fall, but the supply-side remains “a challenge” with survey measures of input and labour costs growth hitting new record highs.

Business confidence fell 5 points to 1 index point, while business conditions eased 2 points to 13 index points, with all three components of conditions easing in the survey.

The slump in confidence follows three consecutive interest rate rises by the Reserve Bank in recent months as inflation exceeded its 2-3 per cent target band and is expected to hit 7 per cent later this year.

Companies were increasingly wary of how the economy would hold up over the months ahead, despite continuing to experience fairly strong conditions at present, NAB chief economist Alan Oster said.

But Mr Oster saw reasons for optimism – including elevated household savings and a strong labour market – which in his view will offset concerns about the impact of inflation and interest rate rises on consumers.

“The extent to which businesses’ fears are justified remains to be seen,” Mr Oster said.

Confidence in the retail sector “took a significant hit”, falling more than 20 points to be well into negative territory, reflecting concerns about the outlook for household spending.

But business conditions remain strong across the states and in most industries.

Construction remains the only real outlier with building costs high, despite a healthy pipeline of work in the sector, and forward indicators remain healthy with capacity utilisation at 84.8 per cent versus 84.9 per cent in May, and forward orders down 2 points to 10 index points.

“Forward indicators softened slightly in June but still suggest a fairly positive outlook for the coming months,” said Mr Oster. “Capacity utilisation remains around the record high levels seen just before the Delta outbreak in 2021, which should support investment and hiring over coming months.”

But cost growth hit new survey records in June – eclipsing previous peaks seen earlier in the year – with labour cost growth at 3.6 per cent in quarterly terms and purchase cost growth at 4.8 per cent.

Product price growth also rose, with retail sector inflation remaining elevated at 2.9 per cent.

“Businesses continue to face escalating cost pressures,” said Mr Oster.

“Both purchase costs and labour costs are running at record levels in the history of the survey, which reflect the significant global supply shocks that are still flowing through as well as domestic energy disruptions and the very tight local labour market.”

“Higher costs are clearly translating into higher inflation,” Mr Oster added.

“Price measures in the June survey confirm we are heading for another very strong inflation print for Q2 when CPI is released later this month – possibly as high as 1.5-1.6 per cent in underlying terms.”

That would mark the fastest underlying inflation on record, Mr Oster warned.