Now comes the true test for consumer confidence

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by Glenn Dyer

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Concerns about rising inflation and slowing demand dented business confidence in May but the National Australia Bank says conditions and forward orders both remained strong.

News of another month of solid results for conditions and confidence came as the ASX sold off heavily in the wake of two days of intense selling by US markets after the shock 8.6% headline rate for the US Consumer Price Index for May.

The ASX 200 fell more 3.5% after opening down sharply and dropping to be down 5% at one stage in trading.

The Aussie dollar traded under 70 US cents to end locally around 69.50 US cents.

The weakness will hit importers of foreign sources goods, such as retailers and wholesalers but the revenue benefits from a cheaper dollar will not be as big as some might think because so many big exporters already price and conduct business in US dollars – companies such as BHP, Rio Tinto, Fortescue, QBE

But like so many similar situations the intense market volatility and confusion is at variance with what is happening in the wider economy where there are signs of a weakening but not much at this stage.

The NAB said business conditions fell 2 points as profitability and trading conditions edged down from very high levels but the employment index picked up.

Overall conditions remain well above their long-term average at +16 index points.

The NAB said the fall in confidence “was more material but still leaves confidence just above its long-run average at +6 index points.”

“Moreover, the outlook remains positive with capacity utilisation at 85% – almost equalling the record high seen pre-Delta – and forward orders also elevated.

Conditions were strong across industries and states, with soft conditions in construction the only standout as profitability in the sector comes under increasing pressure.

That’s evidenced by a growing number of builders getting into financial problems or collapsing as home building slows and building approvals continue fall (They are down 32% for the year to April, according to the Australian Bureau of Statistics).

Overall, the NAB said businesses in the May survey “saw a slight easing in input cost growth following the record highs reported in April, with labour cost growth of 2.5% (down from 3.0%) and purchase cost growth at 3.8% (down from 4.5%) in quarterly terms.”

“Still, output price inflation remains elevated with final product prices tracking at 1.8% and retail price growth jumping back up to 3.1%, in quarterly terms.

“As such, another strong CPI read in Q2 remains likely, the NAB warned.

Overall, the survey indicates the economy has maintained its momentum into the June quarter “and most businesses are in a strong position despite the inflation headwinds, with the lift-off in official interest rates and global growth risks yet to significantly impact Australia’s economic trajectory.”

Business trading conditions and profitability eased but remained at high levels, while employment edged up 1pt to +12 index points.

Business confidence though fell 4pts to +6 index points to, just above the long-term average.

Capacity utilisation rose from 84.2% to 85% and forward orders also picked up to +12 index points.

“Lower confidence in May likely reflects a range of risks on the horizon,” said NAB Group Economics boss, Alan Oster said in commentary with the report.

“Businesses are facing a new environment of higher inflation, rising interest rates, and risks to global growth. However, confidence is still at a fairly robust level all things considered.”

“Forward indicators in the survey suggest the underlying outlook for Australia’s economy remains positive,” said Mr Oster. “Capacity utilisation is now around the record high levels seen just before the Delta outbreak in 2021, which should support investment and hiring over coming months.”

Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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