Business confidence is making a comeback.
Australian businesses grew more optimistic in June as concerns over the economic fallout from the Middle East conflict continued to ease. At the same time, moderating price pressures reinforced signs that the economy is slowing without a sharp downturn, according to National Australia Bank's June Monthly Business Survey.
According to the report, business confidence rose nine points to -5 index points, marking a third consecutive monthly increase. Although confidence remains in negative territory and below the long-run average, it has recovered much of the sharp fall recorded in March following the outbreak of conflict in the Middle East.
Meanwhile, business conditions were unchanged at +3 index points for a third straight month, remaining below the long-run average of +7.
"The picture that emerges is one of an economy that is slowing, but not as sharply as many had feared a few months ago," said NAB Chief Economist Sally Auld.
The economist added that the results suggest businesses are becoming less concerned about the economic impact of geopolitical tensions.
The survey also found that businesses across almost every industry are seeing price growth return to, or fall below, the pace recorded at the start of the year. Wholesale was the only exception, "suggesting pressures have eased, alongside the fallback in energy and other affected prices," the survey said.
For brokers working with small and medium-sized enterprise (SME) clients, the findings point to a more stable business environment that could encourage greater demand for finance. As confidence continues to recover, businesses may be more willing to invest and borrow, even though overall business activity remains subdued. However, ongoing cost pressures are likely to keep some businesses cautious about taking on new debt.
NAB's survey showed mixed underlying business activity. Profitability improved by two points to break even, trading conditions held at +7, employment eased one point to +1 and forward orders rose one point to zero.
The survey also points to easing inflation pressures, with the cost of goods and materials rising at a much slower pace than earlier this year. Purchase cost growth slowed to 2.0% on a quarterly equivalent basis in June, down from the 4.5% spike recorded in April, shortly after the Middle East conflict began.
The conflict, which erupted in late February, sent global oil prices higher and fuelled a fresh wave of inflationary pressure, including in Australia. However, those cost pressures have since begun to ease.
The latest consumer price index (CPI) data also suggest inflation is moderating. Headline inflation rose 4.0% in the year to May, down from 4.2% in April. Trimmed mean inflation, the Reserve Bank of Australia's (RBA) preferred measure of underlying inflation, increased 3.6% over the year, up from 3.4% in April. While inflation remains above the RBA's 2% to 3% target range, the latest figures indicate price pressures are becoming less intense.
Brokers on the ground have also pointed to the recently finalised federal budget as another factor boosting confidence. With the budget now locked in and policy uncertainty reduced, many borrowers are feeling more comfortable moving ahead with loan applications. In the lead-up to its approval, many had delayed borrowing decisions while they waited for greater certainty about the economic outlook.
"There was a lot of confusion around the negative gearing and the tax [changes]. A lot of clients were confused. Even myself. It took a while to work out exactly what the situation was with the negative gearing," Claire Viskovich, founder, director and mortgage broker at Perth-based Beez Neez Finance, told Australian Broker. "But now that the federal budget has passed, we know what's happening, we know what's going to happen in the next year."
NAB's business report found that confidence improved across every state in June, led by New South Wales, while Western Australia and Victoria also posted solid gains. However, trend confidence remained negative across all states. Business conditions were strongest in Tasmania and Western Australia, while Victoria remained the only state reporting negative trend conditions.
"What we're hearing from customers is that they are feeling more confident about the outlook than they were a few months ago," said NAB Group Executive Business and Private Banking Andrew Auerbach. "But price pressures remain a challenge."
