Inflation rose more sharply than forecast and business conditions and confidence eased in December, with the latter due to the rolling impact of Covid omicron on employment.
While the rise in inflation grabbed the headlines, the National Australia Bank’s monthly survey of business conditions and confidence suggests that employment will remain under pressure for longer, despite the fall in the jobless rate to a multi-year low of 4.2% in December.
As well business confidence in January fell to levels below that seen in 2021 in the Covid delta lockdowns.
In fact the NAB said business confidence fell 24pts in December, from +12 index points to -12. Confidence was down in every state, with the largest falls in NSW (down 31pts) and Vic (down 25pts), followed by Tas (down 22pts) and Qld (down 21pts). Confidence fell in all industries other than mining.
Business conditions fell 3pts to 8 index points. The fall in conditions was driven by the employment index, which fell 9pts to +2 index points. Profitability was up 1pt to +10 index points and trading conditions remained unchanged at +14 index points.
The Australian Bureau of Statistics said the December quarter’s Consumer Price Index rose 1.3% in the last quarter of the year to be up 3.5% over the year. The underlying rate favoured by the Reserve Bank rose an annual 2.6%, above the central bank’s forecast for a 2.25% at the end of 2021.
Higher petrol, child care costs and new home prices rose were among the main drivers for the higher than forecast (economists were expecting a rise of 0.8% to 1%).
A 4.2% rise in new dwelling purchase costs for home buyers and a 6.6% jump in petrol were the biggest price rises over the quarter, followed by a 6.5% rise in childcare costs. Food and non-alcoholic beverages increased 0.7%, with clothing and footwear up 2.6%.
ABS head of prices statistics Michelle Marquardt said shortages of building supplies and labour were contributing to rising property costs for newly built homes. Fuel prices are at a record on this measure.
The 3.5% rise in the CPI was mostly driven by a 32.3% surge in petrol costs because of the jump in global oil prices. That saw the price of goods rise 4.3% over the year against a rise of 2.3% in the cost of services.
“Annual price inflation of goods surpassed that of services in the December quarter and was the highest since 2008,” Ms Marquardt said in a release from the ABS.
“More broadly, global supply chain disruptions and material shortages, combined with rising freight costs and high demand, contributed to price increases across a wide range of goods including dwelling construction materials, motor vehicles, furniture and audio-visual equipment.”
The news of the rise in inflation brought forth a plethora of rate rise calls and forecasts for the Reserve Bank which has its first 2022 meeting next Tuesday. t helped the ASX drop more sharply than it started out with the slide reaching 3% at one stage after the 11.30am release of the price data.
That saw the ASX drop under 7,000 points for the first time since May, 2021. It ended down 2.49% at 6,961 points.
But as headline grabbing as the inflation data was, it was a backward-looking set of figures – although with Russia proving to be a huge pest on the border of Ukraine and boosting oil prices (and its own export revenue from its 10 million barrels a day of production), the 3.5% level for the CPI looks like continuing well into 2022.
For as long as global prices remain high going into 2022, the Australian CPI will be higher than it should be until the well into the second half pf the year (around September-October).
That will divert attention from what is still the biggest economic issue – the impact of Covid omicron on employment, supply chains and especially consumer demand and household spending.
The NAB survey confirms that both conditions and confidence took a hit in January.
The NAB said business confidence “fell sharply in December as the spread of the Omicron variant threatened to dampen the economy’s post-lockdown momentum.”
“The fall in business conditions was driven by the employment component, which fell despite strong jobs growth reported in official data, reflecting the complexity of the labour market situation as businesses faced growing worker shortages and the prospect of a ‘shadow lockdown’ through the summer. (Hence Share Cafe’s point last Friday that the December jobs report was essentially meaningless).
But the NAB pointed out that its survey showed the profitability and trading components of conditions held up in the month.
In terms of confidence, the aggregate index fell sharply to be well into negative territory – below the level seen during the Delta wave – signalling the depth of concern among firms about the trajectory of the outbreak. Capacity utilisation and forward orders both fell back, NAB pointed out.
“Price pressures also continued in December, with both reported labour and purchase cost growth near record levels.
“Final products price growth also edged up from an already high rate and retail price growth printed at 2% in quarterly terms. With significant disruption to supply chains and labour markets, price pressures are to be expected and the key question will be how quickly (if at all) these pressures abate over coming months.
“The December survey showed a large hit to confidence from the Omicron outbreak with considerable falls right across the board,” according to NAB Chief Economist Alan Oster.
“The confidence index fell below the level recorded at the beginning of the Delta outbreak, showing just how concerned business are about the current virus wave.”
“The Omicron outbreak had a significant impact on leading indicators,” said Mr Oster. “That suggests that while the economy was still going ok in December, it was clearly slowing and the warning lights were coming on.”
“Overall, the December survey results are consistent with an economy that’s starting to slow, with some similarities to the data when NSW and Victoria were first entering lockdown,” said Mr Oster.
“That probably means conditions will fall in early 2022. However, we don’t expect the Omicron variant to derail the recovery longer-term,” he added.