Australian businesses turn negative on hiring for the first time in years – and that could lead to increased unemployment

Christopher Furlong/Getty Images
  • Confidence levels at Australian businesses remain weak, according to the latest NAB Australian Business Survey for April.
  • Perceived operating conditions sit near the lowest level since mid-2014. Forward-looking indicators such as new order and operating capacity remain at levels well below those seen in prior years.
  • Firms have turned negative on hiring, adding to risks that unemployment may begin to increase in the months ahead.
  • Official data on Australian wage growth and unemployment will be released later this week.

Australian business confidence remains weak, reflecting the view that operating conditions are nowhere near as strong as they were last year.

And with the outlook deteriorating, there’s growing evidence to suggest employment growth may slow.

That’s the dreary synopsis from the latest Australian Business Confidence report for April released by the National Australia Bank (NAB) on Tuesday with trading conditions, profitability and employment all weakening from the levels reported in March.

NAB

“The surprise jump in conditions last month was unwound this month with business conditions, confidence and forward orders now all below average,” Alan Oster, the chief economist at the NAB, said.

“Business conditions fell to +3 index points after the short-lived bounce last month.

“Abstracting from the recent volatility, trend business conditions are just below average, and well below the levels of early 2018.

“This suggests that the business sector has lost significant momentum but is not yet going backwards.”

According to survey respondents, perceived operating conditions fell across all mainland states except for South Australia during the month.

“The South-eastern states generally continue to show the most favourable business conditions on the mainland and Tasmania continues to standout overall,” Oster said.

“South Australia looks weak, and it is now clear Western Australia has again deteriorated after showing some signs of recovery in late 2017/early 2018.”

With the exception of Tasmania, New South Wales and Victoria, conditions across all other states remain at below average levels.

While not a dire backdrop at this point, Oster said the key development in the May survey was a sharp decline in the employment index which fell into negative territory for the first since late 2016.

NAB

“Future readings of this index should be closely watched as, for the most part, leading indicators of the labour market have remained positive to date but could be expected to decline based on the prior slowing in economic activity,” Oster said.

According to the NAB, at -1, the employment index suggests employment growth will average around 14,000 per month, an outcome, if replicated in official data from the ABS, that’s unlikely to see Australia’s unemployment rate fall without a decline in labour force participation.

“This is in accordance with our view that the slowing in growth will likely mean that no further progress is made on reducing the unemployment rate,” Oster said.

Such a scenario would open the door to a likely rate cut from the RBA given the bank said earlier this month that a “further improvement in the labour market was likely to be needed” in order to to lift underlying inflation back towards its 2-3% inflation target.

The ABS will release Australia’s April jobs report on Thursday this week.

Adding to the negative themes seen throughout the May survey, indicators on activity levels in the future such as new orders and capacity utilisation remained weak.

“Forward looking indicators continue to suggest ongoing weakness in business conditions,” Oster said.

“Forward orders remain negative and below average and while capacity utilisation ticked up, it is only around average and well below the levels seen at the end of 2018.”

Capacity utilisation is not only useful in gauging likely business investment in the period ahead, but also tends to lead changes in Australia’s unemployment rate.

The recent decline in the level of capacity being used at firms, even with the modest increase seen last month, points to the likelihood that unemployment will begin to drift higher in the months ahead.

NAB

While measures on current and expected operating conditions remain depressed in the latest survey, overall confidence levels did improve a touch with the NAB index lifting to 0, up from -1 in April, it remains both below average and near the lowest level since mid-2013.

“Confidence is low across all industries and is negative in retail and wholesale,” Oster said.

Rounding off the soft May update, and likely keeping expectations for renewed monetary policy easing from the RBA firmly in place, respondents indicated that measures of prices and inflation remain weak.

“Price pressures remain weak across the costs variables — including wage bill growth — suggesting that in addition to a slowing in the pace of activity in the business sector, there still remains spare capacity in the labour market,” Oster said.

On Wednesday, the ABS will release Australia’s March quarter Wage Price Index (WPI), another economic indicator that will need to improve in order to help underpin GDP growth and inflation.

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