Australia’s business confidence has come to a halt. According to a monthly assessment done by the National Australian Bank, it has now decreased from 5 to 0, marking its lowest position since January, and business conditions have similarly dipped from their high.
Meanwhile, consumer confidence in Australia has plummeted to its lowest level in nearly two years due to rising interest rates and spiking inflation, raising fears about the country’s economic prospects.
This year, corporate confidence and consumer sentiment have diverged dramatically as households struggled to adjust to the Reserve Bank’s rapid tightening cycle while firms did better. The RBA raised the cash rate this month from a record low of 0.1 per cent in May to 2.85 per cent.
According to NAB Chief Economist Alan Oster, the significant inflation reported in Q3 extended into Q4; therefore, these nominal statistics for October may reflect a real reduction in spending volumes in the month as families begin to feel the effects of higher interest rates.
“Our monthly spending data showed a slowing in spending in October, particularly in discretionary areas such as household goods and recreation and travel, although growth held up in the hospitality sector.”
“Still, it remains early days, and spending growth remains positive across all categories over the past three months, and relative to 2021 when spending was heavily impacted by lockdowns.”
In addition, employment growth slowed in September, while unemployment stayed at 3.5 per cent. With a projected rate of 4.5 per cent in 2024, we anticipate a gradual increase. In Q3, wages should increase by 3 per cent year over year. The large minimum wage hike that went into effect in July and the tight labour market contributed to a further acceleration of wage growth in Q3 to between 0.9 and 1.0 per cent q/q.
For the first time since 2013, it would result in annual underlying pay growth running at 3.0 per cent. Despite the labour market’s progressive weakening, wage growth is anticipated to continue to increase up until 2023, peaking at about 3.5 per cent y/y.
The Forward View
The key dangers, according to NAB analysis, remain unchanged. Domestic concerns include the NAB’s rate prediction being at danger to the upside and growth being at risk to the downside due to wage responses to an unusually tight labour market and the persistence of inflation in general.
Globally, the effects of global monetary policy tightening, as well as China’s ongoing COVID policy, both pose dangers to activity and trade. In terms of the budget, NAB anticipates having a fairly neutral economic impact over the next two years, preventing additional strain on already healthy demand. Economic conditions that are better than expected will aid the budget in the short term, but longer-term structural improvements will be required.
According to Anneke Thompson, Chief Economist of CreditorWatch, the Australian economy will soon be affected by inflation and rising interest rates.
“Yesterday’s release of Westpac’s Consumer Confidence and NAB’s Business Conditions survey gave us the clearest signs yet that interest rate rises and inflation are really about to start impacting the performance of the Australian economy. Consumer confidence was down 6.9 per cent monthly and 25.9 per cent year on year. This is at levels similar to the onset of the GFC and pandemic.
“The Treasurer’s fairly bleak assessment of the economy in the October Budget report, as well as continued strong inflation and rising interest rates, are now firmly on the minds of Australian consumers. The weakening outlook is also finally resonating with Australian businesses, as Business Confidence reported in NAB’s October survey fell below the long-run average.
“While Capacity Utilisation is still very high (85.8) – and this bears a strong correlation to the unemployment rate – forward orders by businesses have weakened by 7pts, and the employment outlook also weakened. This suggests that we can expect the labour market to weaken as fewer jobs are made available.
Softer jobs data as inflation concerns spike
Another poll conducted by ACA Research revealed that Australia had experienced a substantial decline in open positions, with only 24 per cent of SMEs hiring, down from 30 per cent in September and 35 per cent in July.
It’s interesting to see that hiring activity was similarly quite low in October 2021. Since there have been fewer SMEs wanting to fill positions, recruiting has been much easier; 43 per cent of respondents now find it very difficult to hire, down from 57 per cent one month ago.
ACA Research Managing Director James Organ said: “In summary, SME financial indicators remain positive, but weaker confidence about local and global economic conditions continue to point to difficult times ahead.
“Heightened concerns about inflation and softer jobs data likely indicate that SMEs are beginning to plan for some tough conditions over the next few months.”
More on ACA research here.