Business research

Monthly business survey: July 2022

Confidence and conditions recover as economy strains capacity limits


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Business confidence rebounded above average and conditions strengthened in July as companies announced new record levels of capacity utilization, cost growth and price increases. After a steady decline over the past few months, confidence reached +7 index points – a marked recovery in the face of headwinds from inflation and rising interest rates, as well as deteriorating outlook global economies. Trading conditions remain well above average after rising 6 points during the month, with trading conditions, profitability and employment all higher. Strong conditions remained broad-based across states and industries, with a notable recovery in the construction sector. Capacity utilization hit a record high of 86.7%, well above the long-term average of 81.1%, suggesting that the economy may be facing capacity constraints. Further evidence that the economy is reaching its limits comes from cost indicators, which jumped again in July after hitting new highs in June. In quarterly terms, purchasing costs increased by 5.4% (previously 4.8%) and labor costs increased by 4.6% (previously 3.1%), the latter reflecting likely a combination of new hires, overtime, bonuses and underlying wage increases, including the minimum wage decision taking effect. Importantly, strong demand continues to allow companies to pass on higher costs to their customers, with overall product prices increasing by 2.7% and retail prices by 3.3%, both reaching new heights. Overall, the survey suggests that despite global and domestic economic headwinds, demand has remained strong – and inflationary pressure continues to build, suggesting that inflation has yet to peak. maximum.

Confidence rose 5 points to +7 index points, back above the long-term average, and trading conditions rose 6 points to +20 index points. All three components of conditions rose, with business conditions up 7 points to +27 index points, profitability up 3 points to +17 index points and employment up 6 points to also reach +17 index points.

“Companies continue to report that conditions are really strong,” said Alan Oster, chief economist at NAB Group. “While some of the real-time data we are looking at shows signs of slowing down, there is no sign of this in the survey with demand at a very high level. It is important to note that the strength is showing at all levels in terms of industries and across the country.”

“Confidence rebounded in July, which was a bit of a surprise,” Mr Oster said. “Inflation and rising interest rates are clouding the outlook, and there are growing worries about the global economy, but companies seem to have a fairly positive outlook at the moment. Futures orders are also quite strong at +10 index points, which also supports the outlook.

Capacity utilization reached a new record high of 86.7%, compared to 84.9% in June. “The sustained rebound in the first half of the year, coupled with a very tight labor market, really seems to be pushing businesses to their capacity limits,” Oster said. “Capacity utilization is now the highest on record in the history of the survey.”

Cost indicators rose above record highs set in June. In quarterly terms, purchasing costs increased by 5.4% in July (previously 4.8%) and labor costs increased by 4.6% (previously 3.1). Commodity prices rose 2.7% and retail prices rose 3.3% – two new highs in survey history.

“After a record quarter of inflation in the second quarter, the survey suggests cost and price growth accelerated further in July,” Oster said. “For now, it looks like companies are still finding they can pass higher costs onto their customers, but it remains to be seen how long that can last before demand starts to deteriorate.”

“Overall, the survey suggests demand continues to hold up, supporting corporate earnings and job growth,” Oster said. “With businesses running near full capacity and an unemployment rate of 3.5%, materials and labor are becoming more and more expensive, driving up prices. This cycle is likely to continue until demand begins to weaken more noticeably, which we expect to happen over the next few months as rising interest rates begin to weigh on household budgets.

For more information, please see the NAB Monthly Business Survey (July 2022)