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NAB survey and PMIs point to slowing Aus growth and easing inflationary pressures

Dr Shane Oliver, Head of Investment Strategy & Chief Economist at AMP, discusses the December NAB business survey.

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Key points:

  • The December NAB business survey reported an improvement in business confidence from -4 to -1, but business conditions slowed from 20 to 12.
  • The slightly timelier Judo Bank composite business conditions PMI for January improved slightly from 47.5 in December, but to a still soft 48.2.
  • More significantly the NAB survey showed a further easing in cost and price pressures.

The overall impression from these business surveys is that growth has slowed since mid-last year, but not collapsed. The NAB survey also shows a sharp slowing in profitability, employment and forward orders. Of course, the full effect of rate hikes is yet to impact.

Of greater significance though for the RBA is the further decline in cost and price pressures with even labour cost growth slowing in the NAB survey. See the third chart below. Consistent with this, the NAB survey also shows a slowing in capacity utilisation to 83.7% from a high of 86.3% which implies reduced pricing power. The January PMI also shows a downtrend in input and output prices. They are all still high, but are heading in the right direction and likely to slow further as the economy cools in response to higher interest rates this year. This is consistent with inflation likely having seen the peak in the December quarter and likely to slow sharply this year. We expect December quarter inflation (to be released tomorrow) of 7.5%yoy, compared to the RBA’s expectation in November that it would rise to 8%yoy.

We remain of the view that the RBA has done enough rate hikes to bring inflation back to target and that it should and will pause in February to avoid the risk of unnecessarily tipping the economy into recession. But we concede that the strength of retail sales as indicated by the ABS for November and from corporate reports suggests a still high risk of another 0.25% hike in February. Either way, we see the cash rate as being at or close to the top.

Source: NAB, AMP

Source: Bloomberg, AMP

Source: NAB, AMP


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