Economic and financial market update

The view from the trenches

Summary:

• Firms say that activity moderated in January;
• But they report that order books continue to fill up;
• Rising prices is impacting consumer sentiment;
• Households are comfortable about the state of the jobs market.

At the start of each month a swathe of business and consumer surveys are released. The glass half-empty view from the NAB business survey is that firms saw a notable slowing of conditions in January to a below average level. A more realistic interpretation is that this was a pretty good result given the slowdown of spending due to consumer concerns about COVID (and some tightening of government regulations). Another positive sign was in a survey of the service sector conducted by Markit that service sector firms are seeing a bounce in their orders books. 

Material shortages have led to a big rise in purchasing costs. Firms are indicating that so far the rise in final prices has not matched the rise in costs. The other problem that material and labour shortages are causing is delays in delivering goods and services. A survey of the construction industry indicated a big mismatch between builders’ order books and completions. 

Consumer sentiment has declined over recent months, particularly their view about the current situation. That could reflect concerns about COVID or worries about rising interest rates (evidenced by the number of fixed-rate mortgages). But I think the biggest issue is that rising prices is starting to cut households real wages (wages after taking into account price rises). The result has been a significant markdown in views about the state of family finances. 

With a bit of luck with COVID there is a good chance that consumer sentiment will improve in coming months. Concerns about unemployment is very low across all states, and has fallen in most (apart from NSW) over the past half year. 

One thing that is unlikely to improve this year is views about the housing market. Housing affordability is the big concern across all states, but particularly in Tasmania and NSW. It is less of a concern in Perth and Darwin (but only relative to other states). First home buyers are most impacted by affordability. Rising prices and rents continues to attract more investors, particularly in an environment of very low interest rates.

By and large the surveys confirm what we know. The economy slowed in January and rising prices are starting to worry households. A better run from COVID will help unclog supply chains. And will re-balance demand towards the service sector. The result will be moderating inflation. Together with rising wages growth that should put consumers’ in a happier mood. And that will make businesses happy.

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