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Economic Update: Business confidence on the rise

Updated: Feb 21, 2022

The September quarter was a tough one for businesses, notably those that have most of their customers and employees in Sydney, Melbourne or Canberra. We won’t get the ‘official’ read of how the economy went in Q3 until early December, but surveys provide us with a pretty good steer on what the ABS numbers will say.

Business and consumer confidence were down, but it did not sink to the lows of 2020. Part of the reason is that more is now known about COVID, there is less fear of the unknown. It also reflected confidence in the strong health outcomes that have been achieved in Australia. The economy also performed pretty decently. The ACCI/Westpac survey business survey (respondents are mainly manufacturers) indicated that order books filled up in line with firms’ expectations despite the lockdowns. The proportion of firms nominating a lack of orders as a major drawback was comfortably below average.

Manufacturing outlook

The bigger issue for many manufacturers was trying to fill customer orders. The most significant constraint was ‘other’ (government restrictions associated with COVID). But supply-chain problems (materials) and skill shortages (labour) were also key problems. The supply-chain problems created higher input prices and provided headaches for firms to meet deadlines. The tight jobs market led to more firms reporting rising unit labour costs (labour costs after adjusting for inflation).

The strong level of orders during a tough economic period bodes well for a decent economic bounce-back. Order books are only likely to get bigger with Sydney, Melbourne and Canberra opening up. Capex budgets (particularly for plant and equipment) look likely to grow as firms gear up to meet the backlog of orders.

Better times ahead for construction

Many areas of construction should feel confident about next year. In the residential sector, there have been a huge amount of orders for new standalone homes. Sales of existing properties remain strong, although perhaps the looming bounce in supply is why industry confidence about new house (and commercial) sales is low. In some cities (notably Hobart and Perth) there has not been enough stock on the market to satisfy demand. Government incentives, time spent at home and plenty of saving have meant that households are making a few alterations and additions to their family home.

Like in many industries, the big increase in demand for residential construction has come at the same time as there has been supply-chain problems and a lack of skilled workers. This means higher prices. But it also means that the time to complete many building projects will be delayed.

Household inflation expectations are at their highest level in over seven years. Most likely, they think these price rises will be temporary. If that was not the case then more consumers would have noticed the discussion about higher petrol prices and the impact of supply-chain constraints. But the longer the price rises remain high, the more likely that consumers’ (and businesses) will expect them to remain high.

Despite the weaker economy, firms’ remained very concerned about supply chains. That is likely to remain an issue for the next 6-12 months until the global economy fully re-opens. The lack of skilled workers is likely to be a constraint for longer, at least until the immigration program returns to its previous strength.

Original post by Bank of Queensland



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