Business resilience remained robust in July, defying expectations of a cooling economy as 2023 progresses.
Metrics linked to inflation experienced an uptick, challenging the prevailing outlook. Key gauges of demand, profitability, and workforce stability maintained their position well above average, and capacity utilization rebounded significantly to reach an impressive 84.5%. Confidence levels remained subdued, as did forward orders, with both indicators dragged down by starkly negative figures in the retail sector. Notably, retail enterprises continued to report favorable current conditions despite the recent weakness in leading indicators.
Labor costs saw a sharp increase, likely influenced by the implementation of wage hikes, including minimum and award wage adjustments on July 1. This upward trend in costs was mirrored in purchase cost growth, potentially driven by escalating energy prices. Interestingly, this cost pressure seemed to translate into overall price growth, with retail prices surging by 2.6% quarterly and recreation and personal services prices advancing to 2.9%. However, it’s important to note that the relationship between cost hikes and price increments isn’t straightforward. Many businesses reported significant upticks in labor expenses without a corresponding change in prices.
Noteworthy insights from Alan Oster, Chief Economist at NAB:
Business conditions eased slightly by 1 point, settling at a +10 index score in July. Trading conditions, employment, and profitability indexes remained stable, reflecting positive figures.
Alan Oster, NAB’s Chief Economist, commented, “July witnessed the continuation of resilient business conditions, maintaining their above-average stance for the past couple of months.” He further noted, “Business confidence also made gains in July, returning to positive territory, although it still remains modest.”
Leading indicators displayed a mild strengthening, as forward orders rose by 1 point to reach -1 index points. Additionally, capacity utilization exhibited a more pronounced rise, jumping 0.9 percentage points from 83.6% to a solid 84.5%, well surpassing average levels.
Oster highlighted, “While forward orders remain pessimistic, this can be attributed to particularly negative figures in the retail sector. Despite this, the retail industry’s current conditions remained favorable in the July survey.”
The month saw a significant surge in both price and cost growth. Labor costs saw a substantial quarterly increase to 3.7%, up from 2.3% in June, while purchase cost growth climbed to 2.6%, compared to 2.2% in the previous month. Final price growth reached 2%, driven by a notable 2.6% increase in the retail sector and a rapid acceleration in recreation and personal services prices to 2.9%.
Oster explained, “The sharp rise in labor costs during July likely reflects the implementation of wage hikes effective July 1, including those associated with minimum and award wage revisions. Notably, the sectors experiencing the most substantial labor cost growth align with where minimum and award wage employees are predominant.”
“The concurrent increase in labor costs and price growth indicators suggests that some wage adjustments made at the start of the fiscal year were promptly reflected in pricing,” Oster stated. He added, “However, delving into the specifics, the connection between labor costs and prices is intricate. Many businesses that experienced significant labor cost hikes did not mirror this with corresponding price increases.”
Oster concluded, “The reality is that firms’ pricing determinations are influenced by an array of factors, encompassing costs, demand strength, and the broader economic landscape. Nevertheless, the survey results underscore the enduring upward pressures on inflation, despite the positive shifts observed in the Q2 CPI release.”
CreditorWatch’s Chief Economist, Anneke Thompson said: “Consumer confidence continues to bump along at near record low levels, falling by 0.4 per cent in July 2023. Consumers are unlikely to report any improvement in confidence until inflation looks to be firmly in the rearview mirror. Unfortunately, NAB’s Business Survey for July 2023, indicates that cost pressures upon businesses remain elevated, with both price and cost growth rising sharply over the month.
“Unsurprisingly, Business Confidence is weakest in the Retail Sector, at -12 index points. In trend terms, business confidence remains at below average levels, although it did rise slightly in the July 2023 figures released. The retail sector looks to be entering a period of increased business risk, and we are likely to hear more stories of insolvencies and business liquidations in the retail sector in the coming months.
“The continued price pressures coupled with anemic consumer confidence are weighing heavily on profitability, particularly in the household goods and department store sectors. Both of these sectors are selling less product than they did the previous quarter, despite very strong population growth. For furniture, electrical, appliance retailers as well as residential construction wholesalers, conditions are very challenged, as consumers can quite easily tighten spending in these areas, and also did a lot of their household good spending during the lockdown periods. Low residential sales volumes and new dwelling completions also weigh heavily on these sectors.”
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