Has the Reserve Bank’s “control inflation at all costs” approach caused it to miss the chance to ease pressures on the economy?
This question arises after the latest NAB monthly survey of business conditions and confidence revealed that August saw July’s brief blip snuffed out, as worries about employment and profitability returned to the fore.
The survey showed that retail remains the sector under the most pressure, which was also reflected in last week’s GDP figures, where household spending eased by 0.2% due to weak consumption across most of retail, except for furniture and household items like consumer electricals.
There were calls from some analysts for the Reserve Bank to reconsider its inflation-first strategy, but this was again ignored by Governor Michelle Bullock.
The NAB survey, released on Tuesday, showed that business conditions fell below the long-term average in August after July’s brief uptick, while confidence sank into negative territory for the month.
According to the NAB, business conditions fell 3 points to +3 index points, while business confidence dropped 5 points to -4 index points, with significant declines in recreation and personal services, transport and utilities, construction, and manufacturing. In trend terms, confidence remains weakest in retail and wholesale.
The fall in conditions was “driven by a drop in the employment subcomponent of the survey,” the NAB stated, “suggesting weaker trading conditions and profitability may now be more materially feeding into labour demand.”
NAB Chief Economist Alan Oster said in the survey commentary, “Conditions are now clearly below average compared to the history of the survey, reflecting the weakness seen broadly in the private sector as the economy has slowed.”
The NAB also noted that “the fall in confidence was marked, as forward orders remained around the negative level that has persisted for some time. Still, capacity utilisation remains elevated, and capex rose in the month.”
“In terms of price pressures on the input side, labour cost growth eased, but purchase cost growth ticked higher. Retail price growth remains high and continues to outpace broader output price inflation.
“Retail remains the weakest sector in terms of both business confidence and conditions, reflecting the rebalancing of consumer demand away from discretionary goods spending,” said Mr Oster.
“With the recent National Accounts showing very soft private sector growth in Q2, the business survey suggests this has carried into the new financial year and may be beginning to translate into a softer labour market,” the survey commentary noted.
“As expected, the spike in labour cost growth in July seems to have been a temporary, minimum-wage-related effect,” said Mr Oster.
“However, cost pressures remain elevated elsewhere, and retail price growth lifted in August. Ultimately, in our view, while the economy has slowed for now, the rate of inflation remains too high for monetary policy to begin easing, although the labour market will be an increasing focus going forward,” he added.