Storm clouds gather as growth outlook weakens

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Stubbornly high prices and slowing business activity are casting shadows over the Reserve Bank’s chances of a soft landing for the economy.

The pipeline of work in the business sector is drying up, NAB’s business survey has revealed, which has worrying implications for Australia’s economic growth.

Businesses have reported a major pullback in forward orders, with the measure of upcoming work falling six points on NAB’s measure to reach negative-five.

The bank’s chief economist Alan Oster said forward orders had fallen into the minuses previously but it was usually during times of economic turmoil, such as the COVID-19 pandemic and the Global Financial Crisis.

“So this is a big signal that things are slowing,” Mr Oster said.

He said forward orders had historically been the best measure of economic activity in the future and suggested conditions would keep slipping.

The overall business conditions index revealed a steep decline in May, falling seven points to eight index points.

Mr Oster said the conditions index was still tracking above its long-run average but had fallen sharply over the month.

Business confidence fell by four points to negative four and has been hovering around this level for several months.

The gap between business confidence and conditions has been closing, suggesting that interest rate rises and inflation were starting to catch up with the heightened level of concern.

On price indicators, Mr Oster said the modest uptick in price and cost growth was slightly worrying despite trending down from their peaks, suggesting inflation pressures remained a “bit sticky”.

While other price indicators edged up over the month, retail prices continued to fall.

“With the easing in business conditions accelerating and forward orders falling sharply, there is a growing risk that the Reserve Bank of Australia’s attempts to maintain an even keel ‘run aground’,” Mr Oster said.

NAB’s economists also upgraded their interest rate forecasts on Tuesday, with another 25 basis point hike “tentatively” added to its predictions.

That brings the bank’s peak rate to 4.6 per cent, up from 4.35 per cent, with the timing of those two hikes uncertain. The bank has also downgraded its growth forecasts to reflect the higher interest rates.

Commonwealth Bank economist Stephen Wu said the price outcomes contained in the NAB survey would be of concern for the RBA as the battle against inflation raged on.

“We will need a few more months of data to ascertain whether May’s uptick in price pressures is a one-off or if there is an increased concern for the inflation outlook,” he said.

The next round of inflation data is due late in the month when the Australian Bureau of Statistics releases its May consumer price index.

A separate survey on consumers run by Westpac and the Melbourne Institute revealed a recovery in that index from 79 in May to 79.2 in June.

The index has been stuck at “recession lows” for the past 12 months as cost of living pressures and interest rate rises weigh on the minds of consumers.


Poppy Johnston
(Australian Associated Press)


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