The latest National Australia Bank (NAB) survey of business conditions and confidence will not give the Reserve Bank any comfort in its campaign to slow demand and, with it, lower inflation by raising interest rates.
The NAB concluded that “the survey showed no signs that the strong conditions of recent months – including the strength seen in official consumption and retail sales data – had begun to moderate yet”.
That is after four of the five rate rises announced by the Reserve Bank between May and August – there was a 5th last week of half a per cent.
As the NAB said in commentary on the survey’s results “August saw the strength in the survey over recent months roll on, with business confidence and conditions both edging higher.
In other words, the rate rises have yet to produce any pain in the economy.
Confidence rose 3pts to +10 index points, while conditions rose 1pt to +20 index points, the NAB said “Trading conditions rose 4pts to +30 index points, while profitability eased 1pt (unrounded) to +16 index points and employment eased 2pts to also sit at +16 index points.
“Conditions remain strong across the states and in most industries, although the construction sector saw both conditions and confidence fall. Low profitability remains a challenge in the construction sector and the brief rally in the July survey now looks like an outlier,” the bank said on Tuesday.
The survey’s findings support other recent data – car sales hit the second highest level ever in August – retail sales in july were the strongest for four months, petrol prices fell in the month (and continue to fall in September).
Travel data from the Australian Bureau of Statistics showed more than 900,000 people travelled overseas in August, after a similar number went o/s in July as rules on border movements were finally eased. Overseas departments totalled just over 37,000 in August, 2021 because of the severe Covid rules on border movements.
Building approvals and housing finance weakened in July, but that situation was evolving before the rate rises started in May and have been given a kick along by the rise in the cash rates, as has the slide in house prices across the country in August.
New jobs remain solid but there will be a timely update on August’s performance of the labour market tomorrow (Thursday).
And from what the NAB said in its commentary, there appear to be few weak points at the moment except construction.
“Reinforcing the strong overall conditions, capacity utilisation remained at a very high level at 86.3%, and the near-term outlook is also positive with forward orders rising,” the bank said.
“Measures of cost growth eased slightly in the month after reaching record rates over recent surveys but remain very high by historical standards. Labour costs grew 3.5% in quarterly terms while purchase costs grew 4.4%.
“With demand strong, firms continue to pass costs through to consumers with overall product prices growing 2.4% and retail prices growing at an unchanged 3.3%. Recreation & personal services price growth was also unchanged at 2%.
“The recent strength in business conditions carried into August,” said NAB Group Chief Economist Alan Oster. “Official data for retail sales in July confirmed spending remained robust, as suggested by the previous survey, and today’s release shows little sign that August was much different. Conditions are strong across most industries other than construction, where profitability remains a challenge.”
“Cost growth moderated somewhat in August, likely reflecting a range of factors including some easing in commodity prices and, possibly, the passing of the one-off effects of July’s minimum wage change,” said Mr Oster. “Still, growth in purchase costs and labour costs remains very strong.”
“In terms of prices, there was little change with retail prices growing at a very rapid 3.3% in quarterly terms,” said Mr Oster. “Recreation & personal services price growth was also unchanged at a very strong 2%. This suggests firms are continuing to pass through price increases to consumers, setting up another strong inflation result for Q3.”
“Overall, the survey indicates that demand remained strong through August,” said Mr Oster. “We continue to expect that inflation and rising interest rates will eventually begin to weigh on household budgets more materially, slowing the pace of consumption growth and, in turn, helping to ease inflationary pressure.
“So far, however, it appears this dynamic is yet to take hold.”
