JACKSON HEWETT: The ABS Business Indicators report has a positive headline. So why is the sector so concerned?

The economy, outside the public sector, continues to idle in neutral.

The jubilation of an interest rate cut is yet to flow through, and even then, economists expect it will take a few more decreases before sparking a business revival.

Three separate pieces of economic data—the ABS Business Indicators, NAB Online Retail Sales, and ANZ-Indeed’s job ad series—paint a picture of an economy stuck in second gear, with public sector hiring the only significant force keeping employment numbers afloat.

The Business Indicators series, released by the Australian Bureau of Statistics, teased a promising outlook, headlining that company gross operating profits had jumped 5.9 per cent for the quarter.

But the figures incorporate the value of inventories (which are not profits) and so need to be recalculated. Stripping out stock valuation adjustments, the real increase in profits is closer to 3.2 per cent. Mining profits climbed back into positive territory after a weak 2024, and non-mining sector profits rose by a similar margin.

NAB chief economist Alan Oster said businesses are still feeling the pinch, even as some indicators suggest a modest improvement.

“The economy is probably a little better than last quarter, but at 1.2 per cent annual growth, it’s still the weakest outside of COVID since 1991,” Mr Oster said.

The one positive was that the rise in inventories suggested some businesses were building up stock in anticipation of better sales. The larger-than-expected increase in mining and retail trade inventories will contribute to a bump in the upcoming GDP figures, but it’s hardly cause for celebration.

Westpac economist Ryan Wells suggested that the growth in inventory “may suggest that sales (while positive) were not as firm as businesses expected, resulting in a modest inventory build-up.”

A continuing weak spot in the economy is the manufacturing sector, which saw its third consecutive quarterly inventory decline, reflecting a 2.3 per cent drop in sales.

Mr Oster expected that the slow start to the year would likely continue.

“Forward orders in our surveys are quite weak, and that says to us that business is not that confident about where the economy is going,” he said.

Consumers pulling back on spending

NAB’s retail sales figures for January suggest households remain cautious. While online retail sales held steady month-on-month, year-on-year growth slowed to 12.7 per cent, down from the Black Friday and Christmas shopping highs.

By category, grocery and liquor rebounded after a weak December—the only sector to accelerate. Homewares and appliances sales fell, while department stores slowed significantly, a sign that discretionary spending is weakening.

“It’s telling us that the consumer in January wasn’t necessarily very strong. So if we look back, you see it’s fairly strong general sales online around October, November, and then sort of weakness ever since now. It’s not terrible, but it’s not saying that the consumer is doing great,” Mr Oster said.

State-level data showed Victoria, WA, SA, ACT, and NT recording modest growth, while NSW, Queensland, and Tasmania went backwards. The gap between metro and regional spending also narrowed, as regional demand softened.

Mr Oster expected that interest rate cuts wouldn’t immediately boost spending, as nervous consumers would likely bank their savings rather than spend.

“Eventually they will, but in the short term, there won’t be a lot of difference. People, in all our data, say they did not spend their tax cuts. It sort of went sideways for a while, and if anything, the savings rates have sort of gone up recently,” he said.

The same dynamic exists for businesses, which are struggling to pass on inflation-driven price increases to cash-strapped consumers. Mr Oster said businesses would want to see more rate cuts before they start reinvesting.

“It will help confidence, and it would help the cash flow. But at present, to the extent they’ve got slightly better cash flow, they’re saving it.”

Labour market holds, but cracks emerging

The ANZ-Indeed Job Advertisements report reinforced the sense of a slow drift. Job ads fell 1.4 per cent in February, wiping out last month’s modest gain and leaving annual job demand down 9.2 per cent.

Despite the decline, ANZ economist Callam Pickering said labour demand remains resilient, helping to contain unemployment.

“It’s possible the unemployment rate will edge higher this year, but as long as job vacancies remain high, a sharp increase is unlikely.”

Hiring continues to be driven by the public sector, which accounted for 80 per cent of employment growth in the past 12 months. However, wages growth is slowing, suggesting the strong jobs market is not translating into higher incomes.

“Wages growth has slowed to 3.2 per cent now. To put that in context, 12 months ago, it was over four. The weakness in the private sector has been surprising,” Mr Oster said.

Global instability weighing on business confidence

Adding to the lack of confidence is the global political outlook. A domestic election is also expected to have a “short-term” effect on investment decisions until leadership certainty is in place.

The Reserve Bank and Treasury have calculated that tariffs have had a minimal impact on Australia, given the country’s main export industries are already tariff-exempt. But the prospect of a fractured alliance between the US and Europe is making businesses nervous.

“You won’t know what the actual outcome is, and you won’t know what the retaliatory measures are. The next big one is the ones against Mexico and Canada tomorrow, and you’ve got the Chinese with another 10 per cent,” Mr Oster said.

“But the one that I think is just as important, if not more, is Europe.”

With inflation still the primary concern for the RBA, interest rate cuts remain on the horizon, but Mr Oster said they won’t be enough on their own to kickstart business confidence.

“We expect the Reserve to continue to cut more than what the market expects, because we think inflation by the middle of the year will be down to somewhere around about two and a half per cent in a trimmed mean core basis,” he said.

“So we would basically expect to see 25 points of cuts each quarter. So we would expect three cuts this year, and I think the market’s got two, but then we’d have another one early next year.”

For now, businesses remain cautious, consumers are spending selectively, and only public sector hiring is keeping the jobs market afloat. Until rate cuts start filtering through — or confidence rebounds — the economy will stay in low gear.