Business confidence stays solid despite threat of higher inflation and rates

Businesses are enjoying favourable conditions and remain fairly confident, despite the threat of higher and rising inflation and interest rates, NAB’s latest survey reveals.

Businesses in May remained largely untroubled by the steep rise in inflation and borrowing costs, with corporate confidence and operating conditions resilient ahead of last week’s hefty rate hike from the Reserve Bank.

As fears of a looming ­recession in the US sent the Australian sharemarket tumbling on Tuesday, NAB’s latest monthly survey provided evidence that the Australian economy had “maintained its growth momentum” into the June quarter ­despite cost pressures.

The report from the country’s biggest corporate lender showed “most businesses are in a strong position despite the inflation headwinds, with the lift-off in ­official interest rates and global growth risks yet to significantly impact Australia’s economic ­trajectory”.

NAB’s gauges of confidence and operating conditions both eased last month after the RBA delivered its first rate hike in more than a decade, but ­remained “strong”, and firms ­reported solid forward orders.

The survey showed business conditions eased just two points to 16 points, “remaining well above average after a strong first few months of the year”. Business confidence declined four points to six points, just above the long-term average.

“Lower confidence in May likely reflects a range of risks on the horizon,” NAB chief economist Alan Oster said.

“Businesses are facing a new environment of higher inflation, rising interest rates, and risks to global growth. However, confidence is still at a fairly robust level,” Mr Oster said.

But Citi economist Faraz Syed said the survey was taken before the RBA’s surprisingly large 0.5 percentage point rate rise last Tuesday, and did not take into account the higher risk of more large rate rises to come.

“It’s more than likely that business confidence has peaked,” Mr Syed said.

“Risks to consumption and ongoing pressure on input costs suggests the peak in business confidence is behind us but, for now, strong domestic momentum is expected to persist” through the June and September quarters, he added.

“Moreover, we expect price pressures to accelerate further over the coming months because of continued supply-chain issues, and the recent increase in electricity and gas prices, which will raise input costs even more over the winter months.”

The NAB survey showed cost pressures had eased, but remained at very elevated levels, pointing to another strong inflation number through to the middle of this year.

Mr Oster said inflation ­“remains a key challenge”.