AUD low confidence in business conditions by uncertainty globally

This week’s data from Australia highlighted the growing big difference between current activity and confidence.

The business conditions continue to show strength across the economy, confidence has fallen below its long-run average. Arguably this deterioration stems from the availability and price of labor and other inputs as well as the growing uncertainty globally. The rapid turn to monitory policy is also a cause of concern for business, though at the moment the impact on activity is limited given support from labor market and the full re-opening of the service sector. In the second half for 2022 and into 2023, business conditions are likely to come under greater pressure.

The labor market outlook should remain strongly positive, with the June employment print coming in materially higher that expectation at a strong 88k. The employment outcome also saw the unemployment rate fall 0.4ppts to 48-year low of 3.5% despite a 0.1ppt rise in participation. Australia’s labor market is clearly in unprecedented territory, with there now being one unemployed person per job vacancy and a record-high employment-to-population ratio. Gains over the remainder of 2022 will depend on how much further participation can rise as well as the outlook for immigration.

Australia’s arrival and departure data suggests material changes in labor supply through immigration will take time, with a robust increase in arrivals to 737k in June offset by a very strong lift in departures to 885k, reflecting the normalization of visitor flows as a recent short-term visitor arrivals cycle out as departures. This lack of positive new arrivals is also evident in the underlying detail.