Australian businesses have rarely had it better -- and workers could be next

Photo: Robert Cianflone/ Getty Images.

The boom times are back for Australian business with confidence, profitability and trading conditions all sitting well above historic norms, according to the National Australia Bank’s (NAB) January business survey.

And if history is any guide, it points to an economy that will continue to improve in the year ahead, helping to boost business investment, employment and, if things go to plan, wage growth.

Daniel Gradwell, Senior Economist at ANZ Bank, left no illusions as to what he thought of the January report, writing in a note following its release that “businesses have started 2018 with a hiss and a roar”.

“Business conditions jumped in January, hitting the second highest level since the GFC,” he said.

“Confidence also rose further, and is now starting to show some trend improvement after the blip in the middle of 2017.”

Beyond the headline figures which both sit at extremely elevated levels, Gradwell says the details of the report were not only good but “extremely encouraging”.

“Firms report that capacity utilisation is now sitting at the highest rate since 2008, and profitability continues to build on its very strong 2017,” he says.

“Both of these indicators bode well for the labour market, suggesting that we should see further strong employment outcomes and make further inroads into the unemployment rate, through at least the first half of 2018.”

As seen in these two charts below, the NAB report is indeed encouraging on what 2018 may bring for workers.

The first shows the relationship between profitability of surveyed firms overlaid against Australian annual employment growth. The former has been moved forward by six months to demonstrate the impact changes in profitability have had on hiring levels in the past.

Source: ANZ Bank

While not a perfect relationship by any stretch, the current profitability reading points to a risk that employment growth may accelerate even further in 2018, remembering that Australia created more than 400,000 jobs last year, the highest over a calendar year on record.

And with the trend in profits pointing to even firmer employment growth, that could see Australian unemployment fall even further, potentially rapidly if the next chart is anything to go by.

It shows the relationship between the capacity businesses are operating against changes in Australian unemployment.

Source: ANZ Bank

Again, while there have been periods that the two have disconnected, with spare capacity being eaten up, it suggests that Australia’s unemployment rate of 5.5% may not stay that high for low.

It also hints that not only will firms potentially hire more people this year but also lift capital spending, something the Reserve Bank of Australia (RBA) is banking on in order to help boost economic growth.

With history as a guide, Gradwell thinks it could.

“The strength in business conditions suggests that the labour market should continue to report solid improvements over coming months, while the rate of capacity absorption should also underpin growth in business investment.”

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