Decline in business conditions ‘accelerating’, NAB warns
A sharp fall in forward orders and declining business conditions are worrying signs for the economy, the bank cautions.
Business conditions fell further in May with trading, profitability and employment all in decline, according to the latest NAB business survey for May.
The fall in business conditions “appears to be accelerating” said NAB, with conditions dropping 7 points to +8 index points.
Business conditions still remain a touch above their long-run average but they are now well below the levels seen in early 2023.
Trading fell 8pts to +14 index points, employment declined 7pts to +4 index points and profitability fell 5pts to +7 index points.
Confidence also fell in May, dropping to -4 index points in May. It has tracked at or below 0 since February.
“Business conditions recorded a solid decline in May, and it appears the gradual easing we have seen through early 2023 appears to be strengthening,” said NAB Chief Economist Alan Oster.
“That said, conditions remain above average reflecting just how strong the economy was through 2022.”
Mr Oster said the decline in all three sub-components in May suggests that demand growth is now moderating, and trading conditions, profitability and employment are beginning to reflect this.
“The big drivers in the month were transport and utilities, wholesale and mining, which were all at very high levels previously. Retail conditions also eased but remain very solid,” he stated. The biggest concern in the May data was the sharp decline in forward orders, according to Mr Oster. Forward orders dropped six points to -5 index points.
“The forward orders measure typically leads business conditions and historically has been the best measure of economic activity,” he said.
“If orders persist at these levels we could well see ongoing sharp falls in business conditions, highlighting the risks around economic growth through the middle of this year.”
Price and cost growth edged higher during May with labour costs growth increasing 2.2 per cent in quarterly equivalent terms, while input prices rose to 2.5 per cent.
Final products prices growth accelerated to 1.3 per cent, though the retail component continued to ease, slowing to 1.3 per cent in quarterly equivalent terms.
While price measures increased in May, they will remain well below the peaks in mid-2022.
“The trend over the coming months will be important as the RBA tries to assess whether it has done enough and if underlying inflation pressures are easing in a timely way,” said Mr Oster.
“With the easing in business conditions accelerating and forward orders falling sharply, there is a growing risk that the RBA’s attempts to maintain an even keel ‘run aground’.”
CreditorWatch chief economist Anneke Thompson said the fall in confidence levels within the business community reflects the increasing risk levels in CreditorWatch’s Business Risk Index data.
“The number of credit enquiries businesses are making are 2.5 times what they were in April 2022, indicating that businesses are doing more frequent credit checks as insolvency rates increase, particularly in the construction and food and beverage sectors,” said Ms Thompson.
“Court actions are also up 50 per cent year on year, a further sign that a larger proportion of businesses are headed towards insolvency over the next six months, particularly as trading conditions will only get more difficult.”
Consumer sentiment sees slight uptick
The Westpac-Melbourne Institute Consumer Sentiment rose 0.2 per cent to 79.2 in May but has remained at near recession lows for the last year.
Inflation remains the dominant drag on confidence, followed by budget and taxation and economic conditions.
Confidence around jobs is fading, with the Westpac-Melbourne Institute Unemployment Expectations Index increasing 6.6 per cent in June to 131.3. The higher index means more consumers expect unemployment to rise in the year ahead.
“The index has now surged 32 per cent since the interest rate tightening cycle began in May last year with June marking the first weaker-than-average read in the cycle to date,” said Westpac chief executive Bill Evans.
“The latest monthly deterioration was led by those working in the education and hospitality sectors.”
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