Business confidence rebounded in July

Business confidence surprisingly rose in July despite headwinds from inflation, rising interest rates and a deteriorating global economic outlook, according to the NAB Monthly Business Survey.

Businesses reported new record levels of capacity utilisation, cost growth and price rises.

After a steady decline over recent months, business confidence increased 5 points to +7 index points, back above the long-run average.

Business conditions edged up 6 points to +20 index points and remain well above average. All three components of conditions rose, with trading conditions up 7 points to +27 index points, profitability up 3 points to +17 index points and employment up 6 points to also reach +17 index points.

The survey found that the strength in conditions remains broad-based across states and industries, with a notable pickup in the construction sector.

“Businesses are continuing to report that conditions are really strong,” says NAB Group chief economist Alan Oster.

“While some of the real-time data we look at is showing signs of softening, there are no signs of that in the survey with demand at a really high level. Importantly, the strength is showing up across the board in terms of industries and across the country.”

But Oster says inflation and rising interest rates are clouding the outlook, and there are growing concerns about the global economy. Despite that, businesses seem to have a fairly positive outlook at present.

“Forward orders are also fairly strong at +10 index points which also supports the outlook,” he says.

Capacity utilisation rose to a new record level of 86.7 per cent, up from 84.9 per cent in June and well above the long-run average of 81.1 per cent.

“The sustained rebound over the first half of the year, along with a very tight labour market, really appears to have businesses reaching their capacity limits,” says Oster. “Capacity utilisation is now the highest it has ever been in the history of the survey.”

Cost indicators surpassed the record levels set in June. In quarterly terms, purchase costs grew 5.4 per cent in July (previously 4.8 per cent).

Labour costs grew 4.6 per cent (previously 3.1 per cent), reflecting a combination of new hiring, increased hours, bonus payments and underlying wage increases, including the minimum wage decision taking effect.

Product prices rose 2.7 per cent and retail prices increased 3.3 per cent – both also new records in the history of the survey.

“After a record quarter of inflation in the second quarter, the survey suggests cost and price growth have escalated further in July,” says Oster.

“For now, it appears firms are still finding that they can pass on higher costs to their customers, but it remains to be seen how long that can last before demand starts to deteriorate.”

Overall, Oster says the survey suggests demand is continuing to hold up, supporting business profits and employment growth.

“With businesses running at close to full capacity and unemployment at 3.5 per cent, materials and labour are becoming ever-more expensive, driving prices higher. That cycle is likely to continue until demand starts to soften more materially, which we expect to occur over the coming months as higher interest rates begin to weigh on household budgets.”