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While labour costs have risen greatly, new NAB data shows that business conditions have eased and SME confidence has returned to positive territory.
According to NAB’s Monthly Business Survey for July 2023, business confidence returned to positive levels once again, despite costs having increased across the board.
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The major bank’s report revealed business confidence levels increased by 3 points across July, reaching 2 index points and returning to a positive for the first time in over two months.
The survey revealed the wholesale sector bolstered the business confidence results (with an increase of 10 points), followed by construction, up 7 points.
Retail has the weakest confidence levels at -12 index points.
Business conditions
NAB’s survey also revealed business conditions “stayed resilient” in July, as key measures of demand, profitability, and employment held steady at above-average levels.
Business conditions dropped only 1 index point, to 10 in the month, returning to the same level as May.
Conditions fell 6 points in the construction industry to be the second-weakest, on 7 index points, only ahead of manufacturing, on 4 index points.
NAB chief economist Alan Oster commented: “Business conditions continued to show resilience in July and have been broadly steady in the past couple of months at above-average levels.”
The report revealed the most prominent fall in business conditions was in Victoria and Western Australia, down 12 and 9 points, respectively, with South Australian and Tasmanian conditions rising significantly up 25 and 16 points.
Cost increase
The major bank’s survey found both labour cost and purchase cost growth rose over the month, with the former linked to the introduction of changes to the minimum and award wages on 1 July.
The considerable increase in labour costs saw it jump from 2.3 per cent in June to 3.7 per cent, well above the pre-pandemic average of 1.1 per cent.
Meanwhile, purchase cost growth and final price growth also rose (from 2.2 to 2.6 per cent and from 1 to 2 per cent, respectively).
Mr Oster stated: “The rise in labour costs in July coincided with a pickup in the survey’s price growth measures, suggesting some wage adjustments in the new financial year might have been passed through to prices immediately.
“However, when we look at the detail, the relationship between labour costs and prices is not simple and many firms that experience a big rise in labour costs did not increase their prices.
“The reality is that firms’ pricing decisions are affected by many factors, including costs, the strength of demand, and the broader economic outlook.”
Business confidence ‘soft and fragile’
Economists from the major banks have reflected on the new NAB data, with CBA stating that it believed wages growth would “push higher but remain at a level consistent with inflation”.
It added it would be important to see how “persistent these lifts in labour costs and final prices are”.
Meanwhile, ANZ said NAB’s July business survey had a “concerningly large jump in survey’s cost and price growth indicators”.
The big four bank said an “increase in selling costs and retail prices suggests businesses are continuing to pass on higher running costs to households”.
Similarly, Westpac said the latest business survey was “further confirmation of a trend cooling of business conditions” and that business confidence was “soft and fragile”.
The big four bank said despite confidence bouncing back into positive levels (after averaging zero in NAB’s index for the past 10 months), this is still perilous given a background of slowing demand.
It said: “The business conditions index declined by 1 point to be at +10, in July.
“That extends the material slowing of economic activity over the past year, with the business conditions index well below the peak of the September quarter 2022, when it averaged around 25.”
[Related: Business confidence increases as price pressures ease]
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