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Australian Business Grows Pessimistic

Australian business has become increasingly pessimistic in the face of low spending and uncertain economic conditions. The latest NAB monthly business survey reported a sharp decline in both conditions and confidence during November, with the retail sector looking especially weak in the lead-up to Christmas and rising wages also recognised as a big concern. While business conditions and confidence are still above the long-term average, weak household consumption has helped to create a downward trend over the past few months.

According to NAB chief economist Alan Oster, the November slump can be partly attributed to a surprise surge in October: "We expected to see last month's spike in business conditions unwound fairly quickly as it both came as a bit of a surprise, and was also out of sorts with what we were seeing in some of the other leading indicators from the survey, such as forward orders... We are paying close attention to what now appears to be a downward trend in business confidence as that could naturally have some implications for decisions around hiring and investment."

While subdued conditions were noted across a number of industries, most sectors were still above the long-term average. The construction sector remained strong as the only industry where conditions did not fall in November, supported by the large residential property pipeline and additional spending in non-residential construction. Things did not fare so well for retail, however, which slipped back into negative territory as Christmas approaches. "The subdued conditions in retail have been a major concern for some time now, and that was manifested in a very disappointing outcome for household consumption in the third quarter national accounts," said Mr Oster, adding "We may see a bit of a rebound in the fourth quarter, but retailers do not appear to be seeing it."

Along with weakness in the retail sector, business is also concerned with rising energy costs and unsustainable wage growth. While wages were up just 2 percent over the year to September according to the most recent figures from ABS, Australian business reported rising wages as their primary concern. "We saw some tentative signs of higher wages in the survey, although that does appear to be weighing on the confidence of some firms as well," said Mr Oster. Final product prices continue to slip behind input costs, with most experts forecasting another weak quarter of inflation coming up. According to the report, cautious spending behaviour by consumers is mostly responsible for soft retail and personal services prices.

Despite falling conditions and confidence, there is nothing in the survey to alter the bank's long-term view of the Australian economy: "We remain cautiously optimistic that Australia will see temporarily above trend economic growth in coming quarters, and while there are still some significant challenges to the outlook, support from business investment and infrastructure construction should be enough to prompt the RBA to consider a gradual removal of emergency policy stimulus." NAB commentators join most experts in their expectation for the first RBA hike to come in the second half of 2018, although this remains dependant on the strength of the labour market, wages growth, and wider economic conditions.


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