Supply issues easing, but labour woes still bite – NAB

Big bank's quarterly survey shows materials availability is improving, but labour market remains extremely tight

Supply issues easing, but labour woes still bite – NAB

Supply-side issues in the economy improved in Q2, according to the latest Quarterly Business Survey from National Australia Bank. However, the labour market remains extremely tight, with labour still being a constraint for most firms.

The survey revealed that the share of firms reporting materials availability as a constraint declined to 36%, down from over 50% in 2022. Yet, the share reporting labour as a constraint only fell slightly, remaining over 80%. The results also indicated signs of a slowing economy, as business conditions fell from very elevated levels (though still above average), and forward orders turned negative, similar to what was seen in NAB’s Monthly Business Survey.

Cost growth measures continued to gradually moderate, and wage growth measures remained contained. The expected average wage growth over the next financial year is running at 1.7%, down from 1.9% in Q1. However, wage costs remain a significant concern for firms, along with pressure on margins. Overall, the survey suggests that activity is beginning to soften after an extended period of rebound, and progress on inflation is likely to be gradual and happen with a lag.

The survey also revealed that business conditions fell eight index points to +9, which is still above the long-run average of +3. Trading conditions, profitability, and employment all declined, with manufacturing (+4) and construction (+2) being the most affected industries. Conditions remained strong across the states, except for Tasmania (+1).

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Business confidence edged up one index point but remained negative at -3. Expected business conditions fell to +14 index points at a 3-month horizon, down from over +20 index points in Q1, and forward orders turned negative at -1 index point.

Consistent with our Monthly Business Survey, today’s release shows business conditions have moderated considerably in Q2,” said Alan Oster (pictured above), chief economist at NAB. “Conditions are still a little above their historic averages but have fallen a long way from the highs seen in 2022, indicating the economy has slowed as the year has gone on. Forward looking indicators in the survey have also softened, indicating firms expect there is further slowing to come. Business confidence has been negative for some time, but the more concrete forward orders measure is now also negative.”

While supply chain issues have improved, wage costs remain a top concern for businesses, along with margin pressures and the availability of labour.

“The response of wage growth to the very tight labour market remains a key question for the economy,” Oster said. “Firms are clearly concerned about the pressure for wage growth with this being the top issue affecting confidence. Pressure on margins is also a concern as the economy slows and the scope for firms to pass on costs to their customers becomes more limited.”

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