Australian businesses are still in pretty good shape even as consumers rein in their spending and remain fretful about their personal finances and the waning economy.

Business conditions as tracked by the National Australian Bank each month dropped off a little in July but are still hanging on at above-average levels.

The index fell one point to 10 index points in July, with trading conditions, employment and profitability all holding fairly steady.

That’s despite expectations of slowing activity as interest rate hikes work through the economy and hammer down demand.

NAB chief economist Alan Oster said the July results were much stronger than he expected.

“It’s saying the economy is actually performing well,” he said.

But business confidence levels remained lacklustre and forward orders were weak, and were particularly gloomy in the retail sector.

Capacity utilisation, which measures how much slack there is between possible output and what is being produced, picked up a little.

“So it’s not as if it’s an economy that’s falling over, but it does say there’s a lot of stress in retail,” Mr Oster noted.

The survey also captured an expected jump in labour costs as the minimum and award wage decisions kicked in on July 1.

Mr Oster said the rise in wage costs was accompanied by a pick up in price growth measures, which could be read as firms immediately passing on their higher wage bills to their customers.

But a look under the hood revealed a more complicated relationship between labour costs and price-setting, with many firms reporting notable wage growth but still leaving their prices steady.

“The reality is that firms’ pricing decisions are affected by many factors, including costs, the strength of demand and the broader economic outlook,” Mr Oster said.

The survey also revealed weak but improving business confidence, which contrasted against ongoing pessimism among consumers.

Two separate surveys gauging consumer confidence levels revealed a muted response to the Reserve Bank’s decision to keep interest rates on hold in August.

A monthly index assembled by Westpac and Melbourne Institute lost 0.4 per cent in August.

Following the August cash rate decision to stay on hold again, which fuelled speculation the tightening cycle was over, the index captured a slightly more upbeat attitude.

Westpac senior economist Matthew Hassan said the RBA’s warnings it may keep tightening, if the data calls for it, could explain the lacklustre response.

“Consumer nerves about the interest rate outlook are likely being compounded by ongoing cost-of-living pressures,” he noted, singling out rising petrol prices and electricity bills as key pain points.

A weekly consumer confidence gauge from ANZ and Roy Morgan also failed to respond enthusiastically to the improving outlook for interest rates, sinking 3.4 points last week.

Poppy Johnston
(Australian Associated Press)