Daily Management Review

Australian Companies And Consumers Could Experience A Severe Downturn Soon


Australian Companies And Consumers Could Experience A Severe Downturn Soon
Tuesday's Australian business and consumer surveys indicated that the economy was in trouble, with a decline in company activity accelerating and spending confidence remaining close to recessionary levels, all with predictions of upcoming rate hikes.
A carefully monitored poll by the Reserve Bank of Australia (RBA) revealed that the National Australia Bank's (NAB) index of business conditions dropped significantly by a whopping seven points to +8 in May after reaching recent highs.
Along with the decline in business confidence, May saw a decline in forward orders, a leading sign of demand, underscoring the dangers to growth in the months to come.
"There is a growing risk that the RBA's attempts to maintain an even keel 'run aground,'" said NAB Chief Economist Alan Oster. "The trend over coming months will be important as the RBA tries to assess whether it has done enough and if underlying inflation pressures are easing in a timely way."
However, the poll revealed ongoing pricing pressures, with the measure of labour expenses and purchase costs rising, which the RBA finds concerning.
Since May of last year, the central bank has increased rates by an enormous 400 basis points, to an 11-year high of 4.1%, and warned that additional hikes may be necessary.
On Tuesday, NAB increased its prediction for the current cycle's peak rates by two additional quarter-point increases to 4.6%. The bank predicted that the unemployment rate would increase to 5% by the end of 2024 from 3.7% in April, while cutting its prediction for economic growth in 2023 to 0.5% from 0.7%.
Markets are already pricing the possibility of two additional rate increases and anticipate higher rates for the rest of the year.
Data from Westpac and Commonwealth Bank of Australia (CBA) further highlights the pressures consumers are under as rising mortgage rates and high living expenses reduce their purchasing power.
Consumer confidence as measured by the Westpac-Melbourne Institute index increased by 0.2% in June to 79.2. The confidence reading came in at 72.6 after the rise, compared to 89.0 previously, which concealed a sizable change between before and after the RBA's most recent boost on June 6.
In June, the indicator of whether it was a good time to buy a key household item decreased by 5.7%, while the forecast for family finances and economic circumstances for the upcoming year declined by 2.1% and 0.1%, respectively.
Given that the survey's results on jobs had been a bright spot in otherwise depressing replies during the previous year, Bill Evans, chief economist at Westpac, said that declining confidence in that area was of greatest worry.
A sub-index measuring unemployment expectations spiked substantially, increasing by 6.6% to 131.3, the first below-average level since May of last year.
Data on CBA payments released on Tuesday showed indications that people were using public transport instead of driving to save money on petrol and parking fees, while working parents having to put in more hours to make ends meet, as shown by increasing childcare charges.
"Consumer spending is generally weak and we expect it will slow further given the RBA's interest rate rises and with more on the horizon," CBA Senior Economist Belinda Allen said.