Economy 'not dying' but firms ready for tough times

Promising economic news has lifted the spirits of Australian consumers though businesses are more cautious and bracing for a lean six months ahead.

The business sector has proved resilient to economic challenges locally and abroad, but recent polling by National Australia Bank suggests confidence and conditions are now tracking below long-term averages.

The business conditions gauge, which captures profitability, hiring movements and sales activity, broke a two-year streak of above-average conditions in January.

The decrease of two points to six index points brought the indicator a little below the long-run average of seven points.

Business confidence actually picked up a little over the month but remained well below the long-run average.

NAB chief economist Alan Oster said there were pockets of stress and weakness, including in retail and manufacturing, but activity levels were holding up reasonably well overall.

"It's more of an economy losing momentum, but basically not dying, I suppose is the bottom line," Mr Oster said.

Surveys of consumers suggest this cohort is more focused on positive economic news, namely progress on inflation.

Consumers have been deeply pessimistic due to higher interest rates and the elevated cost of living, with eroded household balance sheets leading to subdued spending.

But the clouds may be starting to part, with the Westpac and Melbourne Institute monthly survey hitting a 20-month high of 86, well above the 78.5 reading recorded this time last year.

While improving, the mood remained subdued in February, with all components of the index still below the 100 neutral mark.

Retail shopping bags (file image)
Consumer confidence is edging slowly higher.

Westpac senior economist Matthew Hassan said cooling inflation and the shifting narrative on interest rates - towards the timing of cuts - was likely fuelling the confidence turnaround.

Yet the Reserve Bank's caution on inflation and the live possibility more interest rate hikes has likely kept consumers wary.

"Responses over the course of the survey week suggest the rally is still very tentative with a sharp pull-back amongst those surveyed after the RBA’s February policy decision," Mr Hassan said.

The changed stage three tax cuts may also be showing up in the monthly survey results, with upbeat responses concentrated in the middle income bands now in line for more tax relief.

CreditorWatch chief economist Anneke Thompson said the improvement in consumer confidence was unexpected.

"Consumers seem to be watching data trends closely, but maybe reacting a little too quickly to good economic news," Ms Thompson said.

The economist said it would be a while before discretionary spending started to recover given low levels of saving and high housing costs for both mortgage holders and renters.

For businesses, she said sentiment and conditions were starting to converge, with confidence levels softening some time ago.

"This data tells us that businesses are expecting weaker conditions over the next six months at least, and have been preparing for this for some time," she said.


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