Business confidence slips back into negative territory amid escalating Middle East war

Business confidence has plunged into negative territory in February for the first time in almost a year, according to a new bank survey, likely reflecting some caution in the wake of the Reserve Bank’s rate hike.

National Australia Bank’s latest business survey on Tuesday also comes amid an escalating war in the Middle East following the US-Israel attacks on Iran at the end of February.

The conflict threatens to push costs higher and fuel inflationary pressures in Australia as oil prices surge.

NAB’s latest survey for February showed both purchase and labour costs for businesses rose 1.5 per cent on a quarterly basis, while final product prices were steady at 0.5 per cent.

“The rebound in cost and price growth in the month highlights that despite the volatility in activity and price measures in the survey, some underlying inflation pressure remains,” NAB economist Michael Hayes said.

The Reserve Bank of Australia has been concerned about the resurgence of inflation that forced it to hike the official cash rate to 3.85 per cent in February, marking the first monetary policy tightening in more than two years.

Worryingly, ANZ and Roy Morgan on Tuesday said consumer inflation expectations have jumped to a three-year high off the back of soaring petrol prices triggered by the Middle East conflict.

Just last week, RBA governor Michele Bullock noted that while measures of longer term inflation expectations remained stable, near-term expectations have increased a little over the past six months.

“We are alert to this risk, and we closely monitor expectations using surveys,” she said at the time.

On Tuesday, AMP economist My Bui said recent developments in the Middle East also posed mixed impact on Australia.

A sustained 40¢ increase in petrol prices at the pump would translate into a 0.8 percentage point increase in headline inflation, she said.

Separate Westpac-Melbourne Institute data out the same day revealed consumer sentiment remained in pessimistic territory in March, despite its index edging 1.2 per cent higher from 90.5 in February.

An index above 100 means there are more optimists than pessimists.

“Responses show the escalating conflict in the Middle East is sparking concerns,” Westpac head of Australian macro-forecasting Matthew Hassan said.

“The March readings are very similar to those seen when Russia invaded Ukraine in early 2022.

“Unsurprisingly, news on interest rates and inflation was also more prominent and assessed as less favourable than in December.”

Ms Bui said both consumers and businesses have started to take a hit from the February rate hike.

“It was not surprising to see a deterioration in sentiment readings today,” she said.

She expects the RBA to hold when it next meets on March 16 and 17, pointing to slowing momentum from consumers amid hotter-than-expected inflation and labour market.

“A hold will leave time for the board to properly assess inflation trend and the impacts from the February rate hike,” Ms Bui said.