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Profitability a key concern as business conditions dip

Consumer confidence took a hit in March, marking a 2.4% decline according to the Westpac-Melbourne Institute’s Consumer Sentiment survey.

Anneke Thompson, Chief Economist at CreditorWatch, noted that consumer confidence has remained close to record lows for the past two years, signalling an enduring period of consumer despondency.

Of particular concern is the sharp drop in the ‘time to buy a major item’ index, which plummeted by 6.6% month-on-month, hitting record lows.

“The Westpac-Melbourne Institute’s Consumer Sentiment survey revealed a fall in consumer confidence at the April survey of 2.4 per cent. Consumer confidence has now been near record lows for two (2) years’ now, representing one of the longest lengths of time of consumer despondency since the survey began. What should be of concern to retailers is the slump in the ‘time to buy a major item’ index, which was down 6.6 per cent month on month, and is at record lows.

“NAB’s Monthly Business Survey showed a slight improvement in confidence, and a slight decrease in business conditions. On balance, however, businesses reported fairly steady conditions. Capacity Utilisation – a very good leading indicator of employment conditions – continued to slowly ease downwards.

“It would appear that businesses that either directly sell or supply the discretionary retail and food and beverage sectors will continue to experience very tough trading conditions as the year progresses. It is unlikely that consumers will feel any genuine financial relief until 2 or 3 drops to the cash rate, and it looks increasingly like we won’t reach that stage in Australia until early 2024. In better news, businesses are not nearly as pessimistic as consumers, driven by those non-retail businesses that have not experienced such an extreme fall in demand. CreditorWatch notes that External Administrations are already well above pre-pandemic levels, and are forecast to increase as consumer conditions remain very challenging and impacts continue to flow through the business community.”

In March, business conditions and confidence showed minimal changes, maintaining the pattern of above-average activity indicators juxtaposed with below-average confidence, a trend observed in the NAB Business Survey over the past year. Retail and construction sectors exhibited positive signals with improved confidence and conditions, although these industries still exhibit the weakest conditions in sectors influenced by interest rates. Businesses in Western Australia reported the most robust conditions among mainland states.

While forward orders, particularly in retail, experienced improvement, they remained negative and below average. There are indications of supply and demand moving towards a better equilibrium, with capacity utilization gradually easing from high levels. Consequently, there was a slight moderation in the growth rates of labor and material costs, though they remain elevated. Retail prices continued to grow robustly at 1.3% quarterly equivalent terms, suggesting that inflation progress will likely be gradual, awaiting the full Q1 CPI result in April.

According to NAB Chief Economist Alan Oster, business conditions decreased slightly by 1 point to +9 index points, primarily due to a decline in profitability by 4 points, while trading conditions and employment remained stable. Business confidence increased marginally by 1 point to +1 index point, still below average.

Oster noted the persistent discrepancy between above-average conditions and below-average confidence, reflecting ongoing concerns among firms about the economic outlook despite its resilience. He emphasized the necessity for a return to equilibrium between these measures, either through improved outlook or a potential economic slowdown.

Positive developments were observed in retail and construction sectors, although they still exhibit weaker conditions overall. Forward orders showed improvement but remained negative, indicative of ongoing challenges. The gradual easing of capacity utilization suggests a gradual balancing of supply and demand, supported by ongoing economic adjustments post-COVID disruptions and monetary policy interventions.

While cost pressures slightly eased in labor and purchase costs, retail price growth remained high, aligning with expectations of gradual progress in inflation towards the target. Oster anticipates further reinforcement of this trend with the Q1 CPI result later in April.

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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