Business conditions improve in April while confidence eases

  • By Zilla Efrat

Business conditions continued to strengthen in April with the recreation and personal services sector making a long-awaited recovery, according to NAB data.

Confidence eased but remained above its long-run average,

NAB says both confidence and conditions now look fairly strong across most industries, with the exception of transport and utilities and construction where cost pressures have been most acute.

Queensland saw conditions strengthen considerably while conditions in Victoria eased, but both conditions and confidence are fairly strong across the states with only Tasmania showing softer confidence levels.

Capacity utilisation also continued to rise, reaching 83.9 per cent.

Cost pressures continued to build, with labour cost growth up to 3 per cent and purchase cost growth reaching 4.6 per cent (in quarterly terms) – both at new highs.

However, output price inflation eased with final product prices rising 1.7 per cent and retail prices up 2.1 per cent. Still, NAB says these rates of price growth remain high in the history of the survey and the strength in underlying costs suggests inflationary pressure is likely to continue building over the coming months.

Overall, NAB says the survey highlights the ongoing strength in activity and the broad-based nature of the recovery, against a backdrop of cost pressures continuing to pose a significant challenge for businesses.

Business conditions rose 5 points to +20 index points, building on gains in March. Trading conditions and profits again drove the result, with trading conditions up 4 points to +27 index points and profitability up 9 points to +22 index points. Employment was steady at +10 index points.

“Business conditions continued to improve in April,” says NAB group chief economist Alan Oster. “Pleasingly, the improvement was largely driven by much stronger conditions in the recreation and personal services sector, which has lagged through the recent recovery period but is now back above their pre-COVID average level.”

Oster adds: “Conditions in most industries now look fairly strong although conditions in construction and in transport and utilities are being held down by negative levels on the profitability index, a sign that cost pressures could be beginning to take a toll on margins.

“Across the states, there was a large improvement in Queensland, and New South Wales and South Australia also made gains, although conditions in Victoria eased.

“Still, conditions are fairly strong across the board.”

Business confidence eased 6 points to +10 index points, still above its long-run average after several months of steady increases. Forward orders also eased slightly to +9 index points, while capacity utilisation rose to 83.9 per cent.

“Business confidence remains relatively high across industries and in most states, with only Tasmania showing noticeably weaker levels,” says Oster.

“Capacity utilisation continues to rise and forward orders are still well above their long-run average, supporting the positive outlook.”

Cost pressures continued to climb after hitting record growth rates in March, with labour cost growth up to 3 per cent and purchase cost growth reaching 4.6 per cent (in quarterly terms). However, price inflation stepped back from the levels seen in March, with final prices rising 1.7 per cent overall and retail prices up 2.1 per cent.

“As expected, the first quarter CPI result showed inflation has risen sharply and the April survey results show little let-up in the underlying cost pressures that are driving prices higher,” says Oster.

“Price growth eased somewhat in the April survey after hitting record rates in March but remained high when looking at the history of the survey, supporting our expectation that inflation will remain elevated in the second quarter and likely in the third quarter.

“Still, the strong business conditions including trading conditions and profitability show that the economy is faring quite well and so far, demand is holding up in the face of higher inflation.”