Cost pressures may be re-emerging for businesses

Besa Deda
03:15pm August 08 2023

Sydney CBD. (Getty)

Key measures of business confidence and conditions were resilient in July, although signs of a re-emergence of costs pressures need to be watched closely.

Business confidence rose 2.4 points to a six-month high, the NAB survey showed, and while conditions nudged lower they held above their long-run average. The findings are consistent with Westpac's new quarterly business snapshot published in July, which showed that in aggregate businesses are in a strong financial position heading into the next part of the economic cycle.

Capacity utilisation lifted from 83.6 per cent in June to 84.5 per cent in July. That’s not far from the all-time high of 86.2 per cent and suggests that the cooling we’ve seen in business credit growth will remain gradual.  

But most interesting was what the survey revealed about prices and costs. Growth in final prices has re-accelerated, stepping up to a quarterly pace of 2 per cent in July, from 1 per cent in June. The monthly change was the biggest in the series dating back to the late 1990s. 

Labour costs also rose to 3.7 per cent in July, from 2.3 per cent in the previous month. 

The possible re-emergence of cost pressures deserves watching, especially if it turns into an underlying trend and shows up in other indicators. It may cast doubt on the emerging view that the Reserve Bank has finished lifting interest rates in this cycle.

The economic slowdown is being led by consumers tightening their belts, and their entrenched pessimism is reflected in the latest Westpac-Melbourne Institute consumer survey. Confidence dipped 0.4 per cent to 81.0 in August, still far below the 100 level that separates the optimists from the pessimists.  

 

Besa Deda

Besa is the Chief Economist of Westpac’s Business Bank. She is also the Chief Economist of St.George Bank, Bank of Melbourne, BankSA and BT, which are other businesses within the Westpac Group. Besa has been with the group since 2009 and is a key spokesperson on the economy and financial markets. She manages a team of economists, regularly presents to clients and appears in the media. Besa is also Chair of the Australian Business Economists organisation and a member of ANU’s Centre for Applied Macroeconomic Analysis RBA Shadow Board. Besa was appointed the Chief Economist of St.George Bank in 2008, a role which saw her become the first female Chief Economist of a bank in Australia. Prior to this, she worked at the CBA and Colonial. She has previously lectured for the Kaplan Business School and written a regular property column for the Weekend Australian.

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