Australia sees strong business conditions and confidence in February, reveals NAB

Highlights

• NAB’s latest monthly business survey revealed that business conditions and confidence improved during February.
• Almost all states except Western Australia showed an incline in business conditions.
• Retail price inflation surged to 2.1% in quarterly terms last month amidst supply-side disruptions.

This morning, National Australia Bank Limited (ASX:NAB) released its monthly business survey report for February, revealing that business conditions improved during the month. The conditions index recovered to higher than its long-run average as virus-related fears subsided and economic data improved.

The February rise came after a fall of 5 pts in business conditions in January 2022 due to uncertainty surrounding the Omicron strain. However, with stability in health conditions and rising employment figures, businesses are once again up and running.

NAB data suggests that business conditions rose 7 pts to 9 index points in February. The sharp rise was triggered by an improvement in the employment index, which soared 9 pts to 8 index points. Meanwhile, trading conditions rose 2 pts to 10 index points, and profitability was up 3 pts to 5 index points.  Additionally, business confidence rose 8 pts to 13 index points, building upon the momentum seen in January.

It is worth noting that NAB’s previous month’s data showed the drastic effect of the Omicron variant in clouding the business outlook. During January, all three components of business conditions (employment, trading conditions and profitability) were down. Thus, February gains are significant in highlighting the impact of a change in businesses’ views regarding the new strain and its relatively milder effects.

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States and industries resonated with the upswing

Almost all states showed a similar incline in business conditions except Western Australia, where border reopening was postponed. In terms of business confidence, Western Australia and Tasmania showed a decline while all other states reflected an improvement. Victoria and New South Wales showed robust improvement in business conditions.

Across industries, big gains were observed in business conditions in retail and transport & utilities. Improvement was also visible in the recreation and personal services sector. These industries have benefitted from the push back to normal working conditions. Areas such as transport and recreation require an offline presence, which has rebounded strongly over February.

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Cost pressures passed on to consumers

Businesses reported higher growth in costs during February, possibly affected by the ongoing supply-side disruptions. However, some improvement was observed in purchase cost growth from the high levels seen in January.

In quarterly terms, purchase cost growth was reported to be 2.7%. Both labour cost growth and final product price growth remained steady at a higher rate. Additionally, retail price inflation surged to 2.1% in quarterly terms, reaching the levels seen at the end of 2021. This reflects the fact that costs are being passed onto the consumers as supply-chain obstacles take time to recede.

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Forward orders rose by 4 pts to 9 index points, and capex surged by 5 pts to 8 index points last month. At the same time, capacity utilisation rode higher from 81.7% in January to 82.5% in February on the back of strengthening retail sector.

Bottom Line

The effect of shipment delays and supply-chain disturbances is still evident across the broadly improving business conditions data. The February data shows Omicron fears subsiding after creating major uncertainty among workers in the first half of January 2022.

However, there are still uncertainties due to the Russia-Ukraine war, which is likely to impact business conditions in the coming months. The extent of the impact of this war remains unknown, but purchase costs might inch higher owing to ongoing pressures. Overall, the momentum from 2021 has helped present a strong outlook for businesses.

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