Another 0.25% increase in the cash rate, please, Governor Lowe might be the request from Reserve Bank economists after the latest survey of Australian business conditions and confidence from the National Australia Bank revealed a strengthening in activity back to pre-Covid highs.
The NAB’s monthly survey of conditions and confidence is the most recognised of its type in accurately capturing what is going on month to month in Australian business.
This year it had shown that activity and, to a lesser extent, confidence have recovered from the initial hit from higher energy costs and inflation and then the Reserve Bank’s determined effort to lift interest rates to slow demand and price pressures.
The latest survey, issued yesterday, showed that the economy has “remained resilient through the third quarter, despite the challenges from higher inflation, rising interest rates and a gloomy global outlook,” according to the NAB.
“Encouragingly, the cost and price growth measures suggest the peak in inflation may be near,” the bank added in its commentary from NAB Chief Economist, Alan Oster.
The survey showed that business conditions “strengthened further in September (up 3 points to 25 index points) on the back of very high trading conditions and are now above their pre-COVID peak,” while business confidence dipped.
“Trading conditions drove the increase, rising by 9pts to +39 index points. Profitability and employment were little changed at +19 index points and +16 index points respectively,” the NAB said.
“Conditions remain strong across industries and states – with wholesale and retail rising notably in the month. Capacity utilisation also remains high notwithstanding a small easing in the month.”
Business confidence remains close to its long-term average. Confidence fell in a number of industries including retail, wholesale, transport, recreation & personal services, and finance, business & property. Confidence was mixed across the states, with SA and Tasmania improving but NSW and Qld lower, according to the survey.
“Confidence eased in the month but is still around the long-run average in the history of the survey,” said Mr Oster. “The confidence index has been volatile recently but is clearly a little lower than it was early in the year when the passing of the Omicron wave was providing a strong reason for optimism. Still, businesses are far from pessimistic” the NAB remarked.
“Labour and purchase costs growth continued to show the early signs of an easing from their recent peaks but remain elevated. Price growth also eased but still points to a very strong Q3 print for the underlying CPI (on October 26),” the NAB revealed.
“Conditions are now higher than their pre-COVID peak, which shows just how strong demand is at present,” Alan Oster said in a commentary.
“The current level of conditions are only exceeded by the post-lockdown surge in early 2021. Clearly, consumers are still finding a way to keep spending, with the very strong labour market, savings buffers and a broader post-pandemic recovery all playing a role.”
“Importantly, we are seeing fairly robust conditions across sectors and across most of the states,” said Mr Oster. “While construction is still lagging a little it is well into positive territory at +11 index points in trend terms. Likewise, conditions are lagging a little in South Australia but still positive overall.”
“Forward indicators in the survey are very strong, further supporting the outlook,” said Mr Oster. “Forward orders are very strong at +15 index points, and capacity utilisation remains very strong.
Importantly, the capex index is also very strong at +17 index points, suggesting firms are responding to strong conditions and a tight labour market by investing in their business operations.”
“Price growth measures also eased a little in September but we still expect a very strong Q3 CPI print given the elevated levels of costs and prices over recent months,” said Mr Oster. “We continue to expect CPI to peak in Q4.”
“Overall, the survey indicates the economy has remained resilient through recent months despite the challenges from higher inflation, rising interest rates and a gloomy global outlook, and there are signs that cost pressures may be easing. That is all good news for the economy and for businesses, at least for the time being.”
Jobs data a week tomorrow for September will be the second last major bit of information ahead of the RBA board meeting on November 1. The final bit will be the September quarter Consumer Price Index and monthly indicator for September on October 26.
Governor Lowe surprised all with a rise of 0.25% at the start of this month and the betting he will add a similar rise next month then sit tight till next February.
