Business sentiment in Australia holds up despite acute cost pressures

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(Bloomberg) — Business conditions in Australia continued to improve in April, while labor costs and output prices remained high, a combination suggesting that interest rates will rise further to curb inflation.

Business conditions – measuring recruiting, sales and profits – rose to 20 points in April from a revised 15 the previous month, a survey by National Australia Bank (OTC:) Ltd. found on Tuesday. Confidence fell six points to 10, still above the long-term average, NAB said.

Cost pressures remain acute after reaching record levels in March, with quarterly labor costs rising to 3% and purchasing costs reaching 4.6%, the survey found. Price inflation fell from record levels in March, NAB said.

“April’s survey results show little slowdown in underlying cost pressures,” said Alan Oster, chief economist at NAB. “Price growth slowed slightly in the April survey, but remained high when looking at the history of the survey, supporting our expectation that inflation will remain high.”

A spike in headline inflation in the first quarter to above 5% prompted the Reserve Bank of Australia to raise interest rates by a higher-than-expected 25 basis point hike last week to bring the spot rate to 0.35%. Financial markets are pricing in monthly hikes for the rest of the year, which should push the spot rate above 3%.

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“Strong business conditions, including trading conditions and profitability, show that the economy is doing reasonably well and so far demand is holding up despite higher inflation,” Oster said.

The data shows that trading conditions increased by four points to 27 points in April and profitability increased by nine points to 22. Employment remained stable while capacity utilization rose to 83.9%.

©2022 Bloomberg LP



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