Business inflation surges; Solid lift in new home sales

NAB Business survey; New home sales

What happened? The NAB business confidence index fell by 9.3 points – the most in 11 months – to 10.7 points in June. And the conditions index fell from a record high 35.8 points in May to 24.1 points in June with the 11.7 point decline the biggest in 14 months.

Business costs are increasing. Labour costs grew at a 1.9 per cent quarterly rate in June (the strongest growth rate since July 2010) with purchase costs up 2.1 per cent (the strongest rate since October 2008). And final product prices lifted at a 1.5 per cent quarterly rate in June – the strongest growth rate since July 2000.

Implications: Bloomberg data shows that equity analyst estimates for Australian corporate earnings have jumped to $415.63 per share on July 8, 2021, the highest level since November 25, 2008. But Sydney’s escalating virus crisis and rising cost pressures may prompt Aussie companies to issue more profit warnings than previously expected ahead of next month’s corporate reporting season.

Other economic data: In seasonally adjusted terms, private new detached home sales rose by 14.8 per cent in June to 5,841 units. Over the year to June, sales were 44.9 per cent higher than the previous year.

The business survey has broad implications for investors and the economy. The home sales data has implications for banks, retailers, developers, building and building material companies.

What does it mean?

• Aussie business confidence, as measured by the NAB, fell by the most in 11 months in June as virus lockdowns across the country unnerved business owners. Sentiment fell most in NSW and Queensland with social distancing measures weighing on the recreation and personal services industry the most. Conditions slid from record highs in May, but key measures of profitability, employment and trading conditions all remained elevated in June.

• While uncertainty over Sydney’s virus lockdown and border closures will unnerve businesses, perhaps an even bigger headache for Aussie firms relates to inflationary pressures due to labour shortages and supply chain bottlenecks. In fact, labour costs rose at a 1.9 per cent quarterly rate in June (the strongest growth rate since July 2010) with purchase costs up 2.1 per cent (the strongest rate since October 2008). And final product prices lifted at a 1.5 per cent quarterly rate in June – the strongest growth rate since July 2000.

• A two-speed Aussie economy may emerge in the September quarter with Sydney’s Delta virus crisis dampening economic activity in NSW. In the rest of the country, increased mobility could boost consumer spending. Of course, the economic expansion continues to be supported by booming regional Australia, with the housing, mining and agricutural sectors still performing strongly.

• As was the case last year with Victoria’s lengthy lockdown, a bounce-back in economic activity can be expected in NSW once restrictions are eventually eased, supported by additional fiscal stimulus, elevated household savings, better job security, the ‘wealth effect’ from rising asset prices and higher vaccination rates.

• Commonwealth Bank (CBA) credit and debit card spending last week highlights the divergence in consumer spending associated with recent lockdowns nationwide. CBA Group economists reported that growth in card spending in NSW slowed to 2.1 per cent versus 2019 levels, compared to 9.9 per cent the week prior. But spending in the Northern Territory surged 18.7 per cent for the week ending July 9 compared to 2019 levels (prior week: up 2 per cent); Queensland spending jumped 16.8 per cent last week vs 2019 (prior week: up 18.7 per cent); and Western Australia spending lifted 22.4 per cent last week vs 2019 (prior: up 15.9 per cent) as government restrictions were lifted.

• Consumer confidence, as measured by ANZ economists, rose by 2 per cent last week on the back of an easing of restrictions outside of Sydney, but “A comparison between Sydney and Melbourne shows that even though there is a sharp decline in confidence in the particular city whenever a lockdown is imposed, sentiment tends to be similar in both cities.” Virus wariness is most evident in Victoria with CBA card spending slowing to 9 per cent for the week ending 9 July from the 20.1 growth rate the week earlier compared to 2019 levels.

• Today the federal and NSW governments are expected to unveil an economic support package, which is likely to include a cashflow boost for Sydney businesses affected by the lockdown. At the same time the federal government has already bolstered income support for workers with people aged 17 or over, and who have less than $10,000 in the bank or other liquid assets eligible for a weekly disaster cash payment of $500 if they worked more than 20 hours a week or $325 if they worked less.

What do you need to know?

National Australia Bank Business survey – June

• The NAB business confidence index fell from 20 points in May to 10.7 points in June (long-run average: 5.3 points). And business conditions index eased from a record 35.8 points in May to 24.1 points in June (long-run average: 5.7 points). Key measures of conditions, including trading, employment and profitability all remain elevated, but fell in June from series highs in May.

• The survey was conducted in the period June 18-30, 2021, covering over 400 firms, with NAB economists reporting, “The Sydney metropolitan area, as well as a number of other capital cities, had locked down by the end of the field work.”

• The proportion of firms reporting that they did not require credit fell from near 50 per cent to around 40 per cent.

• NAB economists noted: “Overall, the survey points to a solid outcome in the June quarter for economic activity – and continues to reflect the support of both fiscal and monetary policy. The experience of lockdowns to date, is that there is a fairly rapid rebound in activity as restrictions are removed – and with most survey indicators still at high levels, the hope is that there is no material easing in hiring and investment intentions which have been critical to the recovery. However, as the economy passes through the rebound phase and into a new period of growth, we would expect some normalisation across the survey variables. We will continue to watch both capacity utilisation and forward orders, which pulled back in the month but are still elevated, alongside confidence and conditions as the economy again enters a period of heightened uncertainty.”

New home sales – June

• In seasonally adjusted terms, private new detached home sales rose by 14.8 per cent in June to 5,841 units. Over the year to June, sales were 44.9 per cent higher than the previous year.

• The Housing Industry Association (HIA) reported, “The strength of new home sales nationally suggests that there will be a significant number of new homes entering the pipeline post HomeBuilder which will ensure activity remains elevated into 2022.”

• And, “Comparing June 2021 quarter to the same quarter in 2019, home sales in NSW increased by 36.3 per cent, followed by Western Australia with a 35.6 per cent increase. Queensland is up by 4.4 per cent compared to the June 2019 quarter, while Victoria is flat (down by 0.1 per cent). At the other end of the spectrum, South Australia is down by 14.4 compared to the June 2019 quarter.”

• HIA said, “This month’s sample captures 18 per cent of Australia’s new detached home building sector.”

• No data was published by the HIA for multi-unit sales.

Published by Ryan Felsman, Senior Economist, CommSec