Tough Business Conditions in May Signal More Trouble for Australia’s Economy

A food delivery worker waits to cross the street in Melbourne's central business district in Melbourne, Australia, on Sept. 2, 2020. William West/AFP via Getty Images

The Australian economy is showing obvious signs of a slowdown as local enterprises report declining activities and more challenging business conditions in May, a new report has revealed.

According to the latest business survey by the National Australia Bank (NAB), businesses across industries were running out of work to do, implying a worrying trend for Australia’s economic growth.

Specifically, forward orders–an economic metric that measures business conditions and economic activity, fell sharply by six points to minus five index points in May, well below the long-run average of one index point and sits at the weakest level in ten years (COVID-19 period excluded).

This was driven by substantial drops in mining (down 31 index points), wholesale (down 28 points) and retail (down 19 points) sectors.

Other industries, except for manufacturing and transport and utilities, also reported decreases in business orders during the month.

While NAB chief economist Alan Oster said forward orders had plunged into the negative territory before, he noted that it usually occurred during economic upheavals, such as the COVID-19 pandemic and the 2008 global financial crisis.

“So this is a big signal that things are slowing,” he said, adding that forward orders had historically been the best measure of future economic activity.

In addition, the report stated there was a material risk that the indicator would trend down further in the coming months.

“If orders persist at these levels, we could well see ongoing sharp falls in business conditions, highlighting the risks around economic growth through the middle of this year,” Oster said.

Drops in Other Business Indicators

Meanwhile, other economic metrics also painted a bleak picture of the conditions of Australian companies.

The overall business conditions index fell seven points to eight index points, with declines recorded in all three sub-components: trading (down eight points), employment (down seven points), and profitability (down five points).

Business confidence dipped four points to minus four index points, with most industries reporting negative sentiment toward the economic outlook.

Regarding price indicators, labour costs rose by 2.2 percent in quarterly equivalent terms, while input prices and final product prices climbed by 2.5 percent and 1.3 percent, respectively.

A man walks past a branch of the National Australia Bank in Melbourne, Australia, on May 6, 2021. William West/AFP via Getty Images

Oster noted that the movement of prices in the coming months would be important as the Reserve Bank tried to figure out whether it had done enough to contain inflation.

“With the easing in business conditions accelerating and forward orders falling sharply, there is a growing risk that the Reserve Bank of Australia’s attempts to maintain an even keel ‘run aground,’” he said.

Echoing the sentiment, Commonwealth Bank economist Stephen Wu said the price outcomes revealed in the survey would be a concern for the central bank in the fight against inflation.

“We will need a few more months of data to ascertain whether May’s uptick in price pressures is a one‑off or if there is an increased concern for the inflation outlook,” he said.

Due to the negative changes in economic conditions, NAB economists updated their interest rate forecast by adding another 0.25 percent to the bank’s previous prediction of 4.35 percent, taking it to 4.6 percent.

NAB also downgraded Australia’s economic growth forecasts to reflect the changes in interest rates.

The business survey comes as an analysis by ANZ Bank and Roy Morgan shows a plunge in consumer sentiment.

The ANZ and Roy Morgan’s consumer confidence index dropped 3.1 points to 72.7 index points in the week ending June 11, the lowest level since April 2020.

The report said confidence plummeted among renters, outright owners and those paying off their homes after the central raised the official cash rate to 4.1 percent in early June.