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Highlights:
Australian consumer confidence shows slight recovery following a sharemarket rally and lower fuel prices.
NAB's Monthly Business Survey reveals weakened business conditions and deteriorating profitability.
Concerns over inflationary pressures persist as business costs rise across various sectors.
The Australian economy, as reflected in the ASX 200, has experienced shifts in sentiment, influenced by various factors such as recent election outcomes, stock market performance, and fluctuations in fuel prices. Consumer confidence, measured by the Westpac-Melbourne Institute Consumer Sentiment Index, showed signs of improvement in May. The index rose modestly after suffering a dip in April, following the announcement of tariff measures by the U.S. government. This rebound indicates that Australian consumers are responding positively to these developments, though sentiment remains in negative territory.
This uptick in consumer confidence is partly attributed to the recovery in sharemarkets and a decline in petrol prices. The improvement is most noticeable among older Australians, who may have benefited from the growth in superannuation-linked wealth. Inflationary pressures, which had previously contributed to pessimism, seem to have moderated, thus supporting consumer optimism regarding interest rates.
Global Tariffs and Economic Outlook
The May index points to the reduction in global economic risks from tariffs, particularly those imposed by the U.S. on various goods. The previous concerns about the impact of heightened tariffs have eased, helping to bolster sentiment. While these risks are viewed as manageable, Australian consumers remain cautious, largely due to ongoing cost-of-living pressures. This issue, alongside expectations of interest rate cuts, continues to weigh on overall sentiment, which remains well below neutral, reflecting more pessimism than optimism.
Despite the improvements in sentiment, the outlook for the Australian economy remains guarded. Unemployment expectations have improved slightly, hinting at positive labor market conditions. However, job advertisement trends in early 2025 suggest a level of caution regarding future employment prospects.
Business Conditions and Profitability
In contrast to consumer sentiment, Australian businesses, as represented in the NAB Monthly Business Survey, are facing growing challenges. The survey for April revealed a decline in business conditions and profitability. While business confidence showed a slight improvement, the overall sentiment remains weak, hovering below long-term averages.
The most significant change noted in the survey is the reduction in capacity utilization, which has returned to pre-pandemic levels. This reversal signals a cooling of the economic momentum seen in the final quarter of 2024. Additionally, the rise in both purchase and labor costs adds to the strain on businesses, making it harder for them to maintain profitability in the current economic climate.
Retail and manufacturing sectors are among the hardest hit, with conditions in finance, property, and business services also deteriorating. Regional variations are also evident, with stronger business conditions reported in Queensland and New South Wales, while Victoria lags behind.
Inflationary Pressures Persist
Another crucial aspect highlighted in the NAB survey is the reemergence of inflationary pressures. Rising costs, particularly in the areas of purchases and labor, are contributing to concerns over the Reserve Bank of Australia’s ability to maintain its inflation target. While the increase in costs is significant, the broader concern remains whether these pressures will stabilize or continue to rise, threatening the central bank’s target over the medium term.
The persistence of inflationary challenges and weak business conditions suggest that the Australian economy may struggle to maintain the growth momentum seen in late 2024. However, the overall picture remains complex, with some sectors performing better than others and regional disparities influencing economic performance across the country.
As the ASX 200 continues to reflect these broader economic trends, market observers and policymakers are likely to keep a close eye on how these developments unfold, particularly in relation to consumer sentiment and business conditions.
