Australia’s Business Confidence Takes a Hit as Interest Rates and Consumer Outlook Deter Sector Performance

Business confidence in Australia has turned negative, with conditions falling below average levels. High interest rates and a darkening consumer outlook are impacting the corporate sector. According to a National Australia Bank Ltd. survey, business confidence fell 4 points to minus 3 after remaining at or above zero since November. Business conditions, which measure sales, employment, and profitability, declined 1 point to 6 in May, below their long-run average.

The survey revealed declines in conditions across most consumer-facing industries such as retail and recreation & personal services, while forward orders remained negative. Capacity utilization remains above average, and measures of cost and price growth increased in the month, indicating that the process of bringing supply and demand back into balance is still ongoing.

Despite raising rates 13 times since May 2022 to combat inflation, the Reserve Bank of Australia has not seen a positive impact on consumer confidence. Australians are tightening their spending habits in response to rising mortgage repayments. Business sentiment, which had been resilient during the tightening, is now on the decline as well.

NAB’s chief economist Alan Oster noted that the survey results reinforce the idea that the path of inflation is likely to be gradual and uneven. He stated that the RBA is facing contrasting risks when it comes to the outlook for growth and inflation. Key data points from the survey include trading conditions and profitability declining by 3 points each, while employment rose by 3 points. Forward orders increased by 1 point to -6, still below the long-run average.

Labor cost growth increased by 2.3% in quarterly-equivalent terms, and purchase cost growth advanced by 1.9%. The capacity utilization rate also saw a slight increase to 83.3%. The RBA is expected to keep rates on hold for the time being as they navigate through these conflicting risks.

In summary, Australia’s business confidence has turned negative due to high interest rates and a darkening consumer outlook impacting corporate sector performance indicators such as business confidence falling four points below zero since November while business conditions slipped one point below their long-run average level in May.