The NAB Business Confidence Survey reveals that economic growth slowed down by the end of 2023, despite outperforming expectations earlier in the year.
This slowdown is starting to lead to positive changes in inflation indicators. However, businesses are still careful about the future, expecting growth to stay modest for now.
Business conditions eased further in December, continuing a cooling trend that gradually brought conditions back to around their long-run average over the course of 2023. Survey measures of trading conditions and employment fell in the month, while capacity utilisation also eased. The decline in conditions was led by manufacturing and construction.
Elsewhere, conditions remained weak in retail but remained elevated in the services sectors. Business confidence rebounded on the back of a recovery in retail confidence but remains well below long run average. Importantly, there were clear signs of further easing in input cost pressures in the month – with labour and purchase cost growth easing. Retail price growth also fell sharply. Some price adjustment through the Black Friday and post-Christmas sales period is normal but the improvement in the survey’s seasonally adjusted price measures likely signals some easing in the underlying pace of inflation.
“Conditions eased in December and are now firmly around their long-run average level,” said NAB Chief Economist Alan Oster. “Conditions started 2023 at a very elevated level but gradually eased over the year as the economy slowed.”
“The decline in conditions in December was particularly notable in manufacturing and construction, but conditions rose in recreation & personal services and transport & utilities so there are different movements occurring across sectors.”
Business confidence rose 8pts to -1 index points. There was a broad-based lift in confidence, led by mining and retail, while manufacturing edged lower. In trend terms, most industries remained in negative territory with the exception of mining and transport & utilities
“Overall, both confidence and conditions are softest in manufacturing, retail and wholesale which reflects that consumers have been cutting back on spending as time has gone on,” said Mr Oster. “There was an encouraging pickup in confidence in the retail sector in December, but it remains to be seen if this will be maintained.”
Leading indicators were mixed. Forward orders rose 1pt to -3 index points despite large falls in transport & utilities, retail and mining. Capacity utilisation edged lower but at 82.7% remains above average.
Price and cost growth declined sharply in the month. Labour cost growth eased to 1.8% in quarterly equivalent terms (from 2.3% in November), and purchase cost growth declined to 1.6% (from 2.5%). Overall price growth eased to 0.9% (from 1.2%), with retail price growth slowing to 0.6% (from 1.8%).
“There was a marked fall in retail price growth in December,” said NAB Chief Economist Alan Oster. “The sales periods around Black Friday and Christmas likely have played a role here but this is nonetheless an encouraging sign that inflation may have eased at the end of the quarter.”
Business Conditions over December 2023 eased further, maintaining the slow downward trend that occurred over 2023. Business conditions are now at around their long run average. Given forward looking CreditorWatch BRI data, we expect the decline in business conditions to continue through early 2024, and for conditions to remain below the long run average at least until the cash rate starts to fall,” said Anneke Thompson, CreditorWatch’s Chief Economist
“The good news is that price and cost growth declined significantly over the month. Quarterly labour cost growth reduced from 2.3 per cent in November to 1.8 per cent in December and purchase costs reduced from 2.5 per cent to 1.6 per cent over the same time period. This is good news for the inflation outlook, and means that businesses are reporting a noticeable moderation of labour and input costs. Capacity utilisation also fell to 82.7 per cent, down from 83.6 per cent. This measure is a very good forward indicator of unemployment, and means that the unemployment should rise slowly over the first half of this year, as the RBA has forecast.
“Today’s data supports the CreditorWatch November Business Risk Outlook (BRI) forecasts, where we reported a current business failure rate of 4.2 per cent is likely to rise to fail per cent of all businesses by November 2024.”