NAB survey reveals worrying signs of a slowing in business activity

Confidence in most industries now in negative territory

NAB survey reveals worrying signs of a slowing in business activity

Business conditions continued to slow down in May, down 7pts to +8 index points, driven by declines across trading, profitability, and employment, according to the NAB Monthly Business Survey for May 2023.

Trading fell 8pts to +14 index points, employment fell 7pts to +4 index points, and profitability fell 5pts to +7 index points.

“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 Alan Oster (pictured above), NAB chief economist. “That said, conditions remain above average reflecting just how strong the economy was through 2022.

“All three sub-components eased in the month, suggesting that demand growth is now moderating, and trading conditions, profitability, and employment are beginning to reflect this.”

By industry, transport and utilities, wholesale, and mining were the big drivers in the month. Retail conditions also eased but remained very solid.

Business confidence, meanwhile, fell 4pts to -4 index points. The dip in confidence touched all industries, except mining, manufacturing, and transport and utilities, which saw modest improvements. Most industries were now in negative territory, with rec and personal and retail having the weakest confidence, in trend terms.

Confidence fell back into negative territory, though [it] has bounced around within the 0 to -4 index point range in recent months,” Oster said. “Our bigger worry is the sharp decline in forward orders in the month.”

Forward orders, which typically lead business conditions and historically have been the best measure of economic activity, fell sharply by 6pts to -5 index points; and if sustained, will likely see a further sharp slowing in demand.

“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,” Oster said.

Both input and output price growth increased in May and remained high. Labour costs growth lifted to 2.2% in quarterly equivalent terms, while input prices climbed to 2.5%. Final products price growth increased to 1.3%, partially reversing the easing seen last month but encouragingly, retail price growth continued to moderate – now tracking at 1.3%, the NAB report showed.

“Our price measures ticked back up in the month and remain strong but are still some way below their peaks in mid-2022,” Oster said. “The trend over 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.

“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.”

See NAB Monthly Business Survey report for more information.

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