Westpac report shows gradual recovery, with optimism rising among businesses
Business conditions in Australia softened in July, with the index dropping to +5 from +7 in the previous month, according to the latest data from Westpac.
The decline follows a notable increase in June, which analysts partly attributed to end-of-financial-year sales. Despite the pullback, most of June’s gains were retained, signalling a tentative improvement from the weaker results seen earlier in the year.
“This recovery is coming from a relatively weak starting point, and the pace looks fairly gradual at best,” said Ryan Wells, economist at Westpac. “While a couple months do not decisively mark the start of the new trend, these latest readings (at the margin) bolster the prospect of a continued recovery in private demand.”
Consumer spending also showed signs of strengthening in the second quarter, supported by higher average net incomes. Data from the Westpac-DataX Consumer Panel and the ABS household spending indicator both pointed to increased real spending. However, analysts noted that it remains challenging to separate the effects of end-of-financial-year discounting from underlying trends.
Regarding business conditions, the July decline was spread evenly across employment (down three points to +1), trading conditions (down three points to +11), and profitability (down two points to +2). All three measures remain below their long-term averages. Employment trends, in particular, continue to lag, which may reflect businesses’ caution in responding to early signs of stronger consumer demand.
“Although the trend for employment remains notably weak, given it is typically a lagging indicator, this may suggest that it will take some more time for businesses to be convinced of the pick-up in consumer demand, which eventually, should support the recovery in employment growth in the private sector,” Wells (pictured right) said.
Business confidence, meanwhile, rose for the fourth consecutive month, reaching +7 in July—its highest level in about three years.
“The past few months represent perhaps the clearest breakaway from this ‘limbo’, an encouraging signal that businesses are indeed becoming gradually more convinced of the economic recovery,” Wells said.
Other indicators from the survey, such as forward orders and capacity utilisation, also point to improving conditions. Forward orders have stabilised after more than 18 months of decline, and capacity utilisation is trending higher, indicating that businesses are considering new investment to expand operations. These developments come despite ongoing global uncertainty, with many Australian businesses viewing themselves as relatively resilient.
On inflation, the survey’s measures of costs and prices remain consistent with the Reserve Bank of Australia’s target range, with the purchase costs and final prices sub-indexes tracking quarterly equivalent paces of 1.4% and 0.9% respectively.
Labour costs rose to 2.1%, reflecting the introduction of new minimum wage and award rates at the start of July.
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