“Our latest business cashflow conditions is consistent with an economic recovery that has moved beyond the initial rebound to a more sustainable path,” Head of Business & Industry Economics Sian Fenner said.
The Westpac Business Cashflow Gauge was flat in the December quarter after a solid Q3 rise, but remained 1.1% higher than a year earlier as private domestic demand and external demand firmed.
Fresh inflation data reinforce this narrative: January CPI rose 0.4% in the month and 3.8% over the year, with the trimmed mean at 3.4%, keeping price growth uncomfortably above target but broadly in line with Westpac’s forecasts for the March quarter.
Including debt servicing costs, Westpac’s Industry Cashflow Gauge shows cashflow conditions over the past year have strengthened across 11 of 13 industries, even though only four recorded improvement in Q4.
Consumer-facing sectors were key beneficiaries, with personal and recreational services boosted by stronger household spending and major events such as the Ashes. However, retail cashflow deteriorated as “extended sales periods and heavier discounting around Black Friday and Boxing Day weighed on revenues.”
The recovery remains uneven across business sizes. Commercial firms are clearly in front: total commercial cashflow conditions have risen for two consecutive quarters and are now nearly 2% above pre‑pandemic levels, supported by a 1.3% quarterly increase in income and modest declines in expenses.
SMEs, by contrast, continue to lag, with cashflow conditions falling 0.7% in Q4 as revenues and expenses both declined and labour costs still accounted for 8.6% of SME expenses, above 2020 averages.
Westpac’s debt coverage gauge – the ratio of savings to liabilities – edged down just 0.1% in Q4 as deposits growth broadly matched lending and remains around 20% above pre‑COVID levels, underlining that “business balance sheets remain in solid shape.”
On the investment side, Westpac economists note private CAPEX grew 7.8% over the year to December, with broad-based gains in non‑mining construction and machinery once data‑centre outlays are stripped out, and CAPEX plans pointing to inflation‑adjusted growth of around 7.6% through FY2026, underscoring that capacity expansion is firmly back in focus.
Looking ahead, Westpac now forecasts GDP growth of 2.4% by end‑2025 and 2.5% by end‑2026, with RBA expected to deliver a further 25bp hike in May before a prolonged pause. Higher rates and sticky inflation are likely to moderate momentum, but wealth effects from rising dwelling prices and accumulated savings should keep household spending relatively healthy, supporting investment in consumer‑facing industries, energy generation and transmission, and AI.
A stronger Australian dollar and ongoing Chinese “exporting deflation” are expected to ease imported cost pressures, particularly for fertiliser, diesel, fabricated goods, and solar panels, offering some relief for agriculture, construction, retail, and other import‑intensive sectors. But with structural constraints in construction and persistent pockets of SME stress, capacity and productivity will be critical in determining how durable this “more sustainable path” ultimately proves to be.
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