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Economic and Financial Market Update: Australian Business - Confidence Rising about the Future

22 October 2021

Summary:

The September quarter was tough for firms;
Although COVID will be with us for a while yet there are good reasons to think that 2022 will be a better one for the economy;
An increasing number of firms are nominating supply chains and worker shortages as problems;
Supply-chain problems are likely to be an issue for the next 6-12 months. Worker shortages potentially longer.

The September quarter was a tough one for firms. Business (and consumer) confidence was down. But it did not sink to the lows of 2020. Order books filled up in line with firms’ expectations despite the lockdowns. The bigger issue was trying to fill customer orders. The most significant constraint was government restrictions. But supply-chain problems (materials) and skill shortages (labour) were key problems. The supply-chain problems created higher input prices and provided headaches for firms to meet deadlines. The tight jobs market led to more firms reporting rising unit labour costs.

The strong level of orders during a tough economic period bodes well for a decent economic bounce-back. Order books are only likely to get bigger with Sydney, Melbourne and Canberra opening up. Capex budgets look likely to grow.

Many areas of construction should feel confident about next year. In the residential sector, there have been a huge amount of orders for standalone homes. Confidence about sales of apartments is OK, in line with industry feedback that orders for unit developments is rising. Government incentives, time spent at home and plenty of saving has meant that households are making a few alterations and additions to their family home. The industry reports strong sales of engineering projects (mining, infrastructure, renewable energy).

Like in many industries the big increase in demand for residential construction has come at the same time as there has been supply-chain problems and a lack of skilled workers. This means higher prices. But it also means that the time to complete many building projects will be delayed.

The services sector has been hardest hit by the pandemic. There was a sharp decline in orders as lockdowns hit Melbourne (in June and then July) and Sydney (in July). There is evidence of a snapback in spending as restrictions have been eased. Firms’ confidence about the future can be gauged by their employment intentions remaining positive throughout the tough September quarter. The other positive is that many firms have been able to pass on some of the rise in costs onto consumers.

Consumers’ have started to note the rise in prices. Household inflation expectations are at their highest level in over seven years. Most likely they think these price rises will be temporary. The longer the price rises remain high the more likely that consumers’ (and businesses) will expect them to remain high.

Rising vaccination rates will mean lockdowns will become less of a risk going forward. But some government restrictions will likely be in place for some time yet. And consumer confidence will depend upon the path of the virus. Despite the weaker economy firms’ remain very concerned about supply chains. That is likely to remain an issue for the next 6-12 months until the global economy fully re-opens. The lack of skilled workers is likely to be a constraint for longer, at least until the immigration program returns to its previous strength.