Business conditions still strong but confidence waning

Businesses remain relatively resilient to economic challenges although the conditions for doing business are expected to deteriorate as the full force of higher interest rates take effect.

The monthly business survey by NAB showed business conditions slipping one point to 17 index points, which is still a ā€œvery strongā€ result compared to historical averages.

But confidence in the Australian business community did sink below zero in the February report, falling 10 points to -4 points.

The confidence indicator lifted into positive territory in January.

Conditions remained elevated across industries and states, with trading conditions and employment holding steady, at 27 and 12 index points respectively, while profitability sunk four points to 14.

Robust conditions were reported across different industries and jurisdictions, with consumer-facing industries, like retail, doing better than business-facing sectors, such as mining and construction.

Leading indicators did ease slightly, however, with forward orders falling three points to 3 index points. Capacity utilisation also dipped but remains elevated at 85.2 per cent.

NAB chief economist Alan Oster said there were mixed signals around prices in the February survey, with labour costs picking back up to 2.8 per cent in quarterly terms from December lows and purchase cost growth remaining elevated at 3.1 per cent despite easing global pressures.

ā€œPrices growth does appear to be easing in retail as global supply issues resolve,ā€ Mr Oster said.

ā€œHowever, our survey shows little evidence of easing in services prices for consumers, which remains a key focus for the RBA.ā€

Mr Oster said the survey confirmed the ongoing resilience in the economy.

ā€œThough we continue to expect a more material slowdown in demand later in the year when the full effect of rate rises has passed through.ā€

The NAB business report was flagged by the Reserve Bank last week as one of four key data sources of interest ahead of the April cash rate decision.

The central bank hiked again in March but softened its language in accompanying communications and suggested it was getting closer to pausing its tightening cycle.

The March interest rate rise spooked consumers and drove confidence down to its lowest point since the early days of the COVID-19 pandemic.

ANZ and Roy Morganā€™s weekly measure of consumer sentiment sunk 2.9 points last week to 77, well below the monthly average of 111.6 over the past three decades.

The weekly barometer of consumer sentiment is now at its lowest point since April 2020.

Westpac and Melbourne Instituteā€™s monthly index also held near historical lows, remaining unchanged at 78.5 in March

Westpac chief economist Bill Evans said sub-80 readings were rare, especially two in a row.

ā€œIndeed, both the COVID shock and the Global Financial Crisis saw only one month of sentiment at these levels,ā€ he said.

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Poppy Johnston
(Australian Associated Press)

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