Business conditions rise in February but too early to be optimistic as confidence, orders remain low: NAB

Business conditions improved in February, but it is too early to say if it was just a one-off blip or the start of a long-awaited recovery, according to a new bank survey.

The latest National Australia Bank monthly business survey released on Tuesday revealed conditions were back to its long-run average, led by a lift in trading conditions and profitability.

NAB chief economist Alan Oster said the improvement unwinds some of the easing in conditions since late 2023. But he warned it was “really too early to say if this is just a temporary lift or the beginning of a more meaningful turnaround”.

Mr Oster said conditions at an industry level were “quite mixed” with some sectors performing strongly and others under a lot of pressure.

“Conditions look very robust in some of the services sectors such as transport, recreation and personal services and finance, business and property,” he said.

“On the other hand, retail and construction both look fairly weak, which reflects direct exposure to the high level of interest rates.”

Business confidence and forward orders fell slightly in February.

“Confidence remains quite weak, as do forward orders, with retail a long way underwater on both fronts,” Mr Oster said.

“The softness in these more forward-looking indicators says that firms really are still quite concerned about the outlook for the economy in the near-term.”

Labour cost growth remained at 2 per cent in quarterly equivalent terms, while purchase cost growth was also steady at 1.8 per cent. Retail price growth rose to 1.4 per cent (from 0.9 per cent), while recreation and personal services prices grew at 1.3 per cent (from 1.1 per cent).

“Cost pressures clearly remain elevated for businesses and it appears there is still some scope for firms to pass this through to output prices,” Mr Oster said.

“The jump in retail price growth in February reverses some of the easing seen over the Christmas/New Year sales period and gives some pause for thought given we had expected to see the goods side of the inflation equation keep improving.”

While NAB expects inflation to return to the Reserve Bank of Australia’s 2 to 3 per cent target range in 2025, Mr Oster has warned plenty of risks remain.

The NAB survey came the same day ANZ revealed consumer confidence rose slightly last week but was still trending sideways.

“Inflation expectations have settled lower this year, signalling confidence in the battle against inflation,” ANZ senior economist Adelaide Timbrell said.