Australian business conditions hit six-year low as profitability takes a hit

Australian business conditions slumped to a six-year low in August as cost pressures hit profitability and firms fret over ongoing global uncertainty and volatility in oil prices.

Conditions are beginning to follow the fall in business confidence, according to the latest sector survey from National Australia Bank on Tuesday, with the latter notably more negative over the past six months.

Business confidence remained well below its long-run average in August.

The fall in business conditions was widespread, hitting most industries, led by construction, mining and manufacturing. But a fall in profitability and trading conditions drove much of the decline.

These measures are now at multi-year lows and sit well below their respective long-run averages. Meanwhile, employment held up better.

NAB chief economist Sally Auld flagged the profit hit as one to watch.

“Should the profitability index remain at depressed levels, we would expect weaker employment outcomes to follow,” she said.

Cost and price growth recorded relatively small moves, but remained elevated, according to NAB.

“The gap between purchase cost growth and product prices is at historically high levels suggesting that businesses face increasing pressure on margins, and validate the decline in the survey’s profitability indicator,” Ms Auld said.

“The August business survey shows a material softening in conditions which — until August — had remained relatively robust to the Middle East conflict and rising interest rates.”

AMP economist My Bui said the weak profitability reflected cost pressures that companies faced.

“Despite rising labour costs and input purchase costs — both of which rose over the month and remain more elevated than the trend in the prior two years — final product prices haven’t gone up as much,” she said.

“As a result businesses will either cut back on hiring in the upcoming months or pass on price hikes, neither of which bodes well for the average consumer.”

Ms Bui said the deterioration in trading conditions showed rate hikes were working, just not yet enough to contain stubborn inflation.

“Interest rates will likely go up to 4.6 per cent before the end of the year given elevated input cost pressures and the fact that trimmed mean inflation hasn’t trended down in the recent months,” she said.

“We think that there is a high chance of the hike coming in September but it’s not a done deal, given the tendency for inflation to surprise on the upside in July. For now the employment report will be the key data to watch before the meeting.”

NAB expects the softening in conditions to slow even more in the second half of the year as businesses struggle to pass on higher costs to consumers.