Business says cost pressures remain weak, but confidence is climbing

Fears that businesses would be hit by a big rise in costs have so far proved unfounded, with the latest NAB quarterly business survey suggesting wage and price growth remains muted.

The survey also shows business confidence is continuing to improve, with sentiment up in every sector other than finance. Confidence jumped sharply in transport and wholesale, but remains subdued in the recreation sector.

NAB chief economist Alan Oster says the survey suggests confidence is riding at pre-GFC highs.

“Business confidence increased in the September quarter to levels consistent with those in 2007,” he says.

“Although lower than the euphoric readings of late last year, confidence is clearly above its long-term average. Nevertheless, concerns remain about the prospect of a double-dip in the United States and that the authorities in China may engineer a dramatic slowing in activity.”

However, business conditions continue to lag behind confidence, with a small fall in employment conditions offsetting increases in profitability and trading.

Stocks and forward orders also dipped, which suggests business conditions may continue to remain sluggish for the next few quarters at least.

Labour costs increased for the fourth quarter in a row, with annual wage growth running at about 2.7%. However, wage pressures do not appear to be increasing too sharply – the annual rise in average earrings under new enterprise bargaining agreements to be negotiated in the next 12 months actually fell from 3.2% to 2.8%.

The number of firms expecting an interest rate rise actually declined from 74% to 69%, but Oster’s predictions say executives have got it wrong.

“The RBA is likely to raise rates before Christmas, probably in November, but the timing is data-dependent (especially on labour market and CPI data).”

“Rates are expected to peak at 5.5% by September 2011 and are likely to stay at this level given the likely strength of demand and tightness in the labour market.”