Australian economy: Consumer and business confidence improve yet remain pessimistic

Brief hopes that the Middle East war had been paused helped spark a rebound in confidence for Australian businesses and consumers.

NAB’s business confidence index lifted nine points in the month, the third consecutive increase.

Yet the overall mood was still sour at a net negative 5 — meaning a marginally higher number of firms were pessimistic than optimistic.

The improvement will be at risk thanks to news overnight that Iran had again closed crucial oil supply route the Strait of Hormuz and US President Donald Trump pledged to impose a 20 per cent shipping levy through the region.

Both surveys caught a brief lull in fears over the war and energy prices.

The outlook for households was modestly improved with the Westpac–Melbourne Institute Consumer Sentiment Index rising from 80.6 points in June to be 83.9 in July.

But Westpac’s head of forecasting Matthew Hassan warned the overall mood was still very bleak.

“Despite the gain, sentiment remains deeply pessimistic,” he said.

“At 83.9, the latest Index read is still in the bottom 10 per cent of results over the 50-year history of the survey.

“Some of the July improvement looks to be relief that ‘worst case’ scenarios around energy prices, interest rates and jobs are not playing out.

“However, family finances are clearly under intense pressure and the outlook is uncertain.”

Cheaper petrol drove much of the improvement, with average national pump prices falling to $1.60 a litre during the survey week and unwinding the earlier war-driven spike.

The biggest gains were among renters, younger Australians and low-income earners, who are generally more exposed to fuel costs.

Households felt slightly better about their finances than a year ago, but that measure remained 14 per cent below its level before the war and this year’s rate rises.

They were more optimistic about the year ahead. Expectations for family finances jumped 13.4 per cent, including a 23 per cent rise among mortgage holders.

Job fears also eased, with unemployment expectations returning to about their long-run average.

The relief did little to loosen household purse strings. Appetite for major purchases barely improved and remained well below average, while homebuyers stayed deeply pessimistic.

Westpac surveyed 1200 adults from July 6 to 9, but said sentiment weakened sharply as tensions worsened during the four-day poll.

Business confidence up but few gains

NAB polled about 307 businesses from June 23 to July 1.

Its research found cost pressures driven by the Iran conflict had “not been as severe as earlier expected”.

“Product price growth is now back to its February level and retail prices declined for the first time in seven years,” the report said.

It noted confidence had “now recovered much of the fall seen in the month of March, immediately after the commencement of the Middle East conflict”.

The lift in confidence was not matched by stronger activity.

Business conditions held at three points for a third month, less than half their long-run average. Profitability improved, trading was steady and employment softened slightly.

Capacity utilisation remained at 82 per cent but has eased through the first half of the year, pointing to more spare room across the economy.

The cost of fuel, materials and other business inputs rose more slowly, easing from 4.5 per cent in April to a quarterly rate of 2 per cent.

Businesses also lifted the prices charged to customers by just 0.6 per cent, while labour costs rose 2 per cent buoyed by the minimum wage increase that took effect on July 1.

Big rates question

The surveys split the banks on interest rates.

NAB said weaker activity and easing capacity pressures should allow the Reserve Bank to hold through the rest of the year. Westpac expects inflation to remain too high and forecasts a quarter-point rise in August.

Both calls predate the latest escalation in the Strait of Hormuz.