Quick Bites | Aust Business Sentiment in Freefall

Coming in quick succession was the double blow to confidence: first the collapse in consumer sentiment, followed shortly after by the plunge in business sentiment.

• Business confidence fell sharply in March following global geopolitical shock;
• Business conditions held relatively steady, signalling prior economic momentum;
• Cost pressures lifted quickly, with purchase costs and prices rising.

The latest business survey by NAB, the first since the war in the Middle East broke out on 28 February, showed confidence collapsing. Business confidence recorded the second largest monthly fall on record driven by increased price pressures.

Source: Trading Economics

The March survey shows business confidence fell 29 points to –29 index points. Business conditions eased only marginally to +6 index points, just below their long-run average.

NAB Head of Australian Economics said the divergence between confidence and conditions highlights how quickly sentiment can respond to global shocks, even as activity data remains more stable in the near term.

“The outbreak of the conflict in the Middle East saw business confidence fall 29 points to minus 29 index points, the second largest monthly fall in the survey’s history, with falls of this magnitude previously only seen in the GFC and the onset of COVID.”

“Business conditions fell only one point to six index points in March, reflecting that while the global news backdrop has impacted sentiment, it is still early days in terms of the flow through to activity… Resilience in business conditions also highlights that the economy had carried a healthy level of momentum heading into the unfolding shock.”

Forward orders fell sharply in March, erasing gains seen earlier in the year and pointing to rising caution among firms. Capacity utilisation, however, rose to 83.1% and is still well above its long-run average.

Business confidence is now negative across all states, while business conditions stay positive in most regions. Western Australia and South Australia recorded improvements in conditions over the month, while Victoria saw the largest decline.

Tough times ahead – “Nightmare scenario”

In a speech on Tuesday, RBA deputy governor Andrew Hauser said sharp falls in confidence indices comes at a time where central bankers faced a “nightmare scenario” of higher inflation and falling growth.

The cratering in consumer confidence comes after Treasury downgraded its growth forecasts for this year ahead of Treasurer Jim Chalmers delivering his 12 May budget in 4 weeks’ time.

The latest figures revealed households were bracing for further price shocks and extended weakness in the Australian economy – spooked by the impacts of conflict in Iran.

“We’re the highest user of diesel per capita in the world. So this is a big real income shock for Australia, even if national income and fiscal coffers may benefit from that export position,” Andrew Hauser said.

“I think if you put that all together, it’s obvious that inflation is going up in the short term, and people are very conscious of that… Consumer confidence indices have fallen. I don’t think those surveys necessarily tell you a lot about what consumption is going to do, but if they’re right, we have a big income shock coming our way. It is a central bankers’ nightmare.”

Treasury has inflation forecast to more than 5% this quarter. The RBA will issue fresh forecasts at its next meeting in May.