Increasing prices, increased demand and continued hiring were hallmarks of the report indicating the economy was still running hot.
The latest NAB Monthly Business Report showed that business confidence rose back above average and conditions strengthened in July as businesses reported new record levels of capacity utilisation, cost growth and price rises.
After a steady decline over recent months, confidence rose to +7 index points – a marked rally in the face of headwinds from inflation and rising interest rates, as well as a deteriorating global economic outlook.
Business conditions remain well above average after rising 6 points in the month, with trading conditions, profitability and employment all higher. The strength in conditions remained broad-based across states and industries, with a notable pickup in the construction sector.
Capacity utilisation rose to a record 86.7 per cent – well above the long-run average of 81.1 per cent, suggesting the economy could be running up against capacity constraints.
Further evidence the economy is reaching its limits comes from cost indicators, which jumped higher again in July after hitting new records in June.
In quarterly terms, purchase costs grew 5.4 per cent (previously 4.8 per cent), and labour costs grew 4.6 per cent (previously 3.1 per cent), with the latter likely reflecting a combination of new hiring, increased hours, bonus payments and underlying wage increases, including the minimum wage decision taking effect.
Importantly, the strength in demand continues to allow firms to pass higher costs onto their customers, with overall product prices growing 2.7 per cent and retail prices growing 3.3 per cent – both at new highs.
Overall, the survey suggests that despite global and domestic economic headwinds, demand has remained strong – and inflationary pressure continues to build suggesting that inflation is yet to peak.
“Businesses are continuing to report that conditions are really strong,” said NAB group chief economist Alan Oster. “While some of the real time data we look at is showing signs of softening, there are no signs of that in the survey with demand at a really high level. Importantly, the strength is showing up across the board in terms of industries and across the country.
“Confidence bounced back in July, which was something of a surprise.
“Inflation and rising interest rates are clouding the outlook, and there are growing concerns about the global economy, but businesses seem to have a fairly positive outlook at the moment. Forward orders are also fairly strong at +10 index points which also supports the outlook.
“After a record quarter of inflation in Q2, the survey suggests cost and price growth have escalated further in July.
“For now, it appears firms are still finding that they can pass on higher costs to their customers, but it remains to be seen how long that can last before demand starts to deteriorate.
“Overall, the survey suggests demand is continuing to hold up, supporting business profits and employment growth.
“With businesses running at close to full capacity and unemployment at 3.5 per cent, materials and labour are becoming ever-more expensive, driving prices higher. That cycle is likely to continue until demand starts to soften more materially, which we expect to occur over the coming months as higher interest rates begin to weigh on household budgets.”
