Business Confidence Slides in Australia Amid High Inflation, Rising Rates

Summary

The National Australia Bank’s (NAB) business conditions index saw a fall. The confidence index also experienced a dip, marking its worst reading since 2012, outside of pandemic times. According to NAB’s chief economist Alan Oster, the current weakness in retail and personal services is reminiscent of times during the global financial crisis. Despite high inflation and rising borrowing costs, increased population growth and government infrastructure spending have offered much-needed support to many firms. The Reserve Bank of Australia’s (RBA) interest rates were raised in November, but remained steady in the following month.

Business and Confidence Index Dip

National Australia Bank’s (NAB) most recent survey revealed a drop of 4 points in their business conditions index, landing at +9 in November. Although this remains above average, it is a noticeable decrease from the highs observed earlier in the year.

The confidence index also saw a decline, slipping by 6 points to a total of -9. Aside from the obvious effects of the pandemic, this is the worst reading since 2012.

Consumer Confidence and Spending

NAB’s chief economist, Alan Oster, noted a significant weakness in the retail and personal services sector. He mentions “To see such a slowdown in these sectors, you’d have to go back to the days of the global financial crisis”.

Despite high inflation and increased borrowing costs, consumers have remained pessimistic compared to businesses this year. However, significant population growth and government investment in infrastructure have provided some relief.

The Role of the Reserve Bank

In November, the Reserve Bank of Australia (RBA) raised its rates to a 12-year high of 4.35%, only to hold them steady in the following month. Oster warns to watch closely if the lack of confidence continues and whether a trend appears in conditions. He suggests it may signal slow growth in Q4.

Effect on Sales, Profitability, and Employment

Furthermore, the survey’s sales measure fell by 6 points to a still healthy +13, and profitability dropped by 5 points to stand at +6. Meanwhile, employment has stayed firm at +8.

Businesses continued to utilise capacity effectively, remaining as high as 83.9%, which resulted in accelerated labour costs at a quarterly rate of 2.2% in November. Purchase costs, final output prices, and retail inflation also increased during this period. Oster expressed hope that slowing activity might result in eased price pressures by early 2024.

Forex Impact

These fluctuations in the Australian economy, especially the changes in the business conditions and confidence indices, can lead to volatility in trading, particularly in the AUD currency pairs. Traders are advised to keep an eye on these economic indicators.

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