SYDNEY, April 14 - Business sentiment in Australia saw a dramatic reversal last month in the wake of the Iran war and the resulting global oil shock, according to a National Australia Bank survey published on Tuesday. The bank's business confidence index dropped 29 points to -29 in March, marking the second largest monthly fall in the survey's history and a decline of a magnitude typically observed during financial crises.
Despite the steep decline in confidence, reported business conditions held unchanged at +6. A component measuring sales slipped by 1 point to a still-firm +11. By contrast, reported profits deteriorated, falling to +1 from +4 in the prior reading, indicating companies are increasingly squeezed on margins as input costs rise.
The survey showed purchase costs surged at a quarterly rate of 3% in March. There are signs businesses are finding it difficult to pass the added expense onto consumers: the quarterly growth rate of retail prices moderated to 0.5% from 0.9%, suggesting weaker transmission of cost increases into final prices.
Monetary policy has moved in parallel. The Reserve Bank of Australia lifted its cash rate for a second time in March to 4.1%, effectively undoing two of the three rate cuts enacted last year. The central bank has estimated that sharply higher fuel costs stemming from the conflict in the Middle East are likely to raise headline inflation to around 5% in the second quarter.
Consumer sentiment also showed notable deterioration. A separate survey released on Tuesday found sentiment in April sank to its lowest level in more than two years. Within that reading, an index tracking willingness to make large purchases plunged 15% as consumers tightened their wallets.
Taken together, the surveys depict a business sector contending with rising input costs and narrowing profits, while households respond to higher prices and rates by pulling back on big-ticket spending. The trends captured in the March and April readings highlight mounting near-term pressures on both corporate margins and consumer demand.
Key points
- Business confidence plunged 29 points to -29 in March - the second largest monthly drop on record.
- Business conditions remained at +6; sales at +11; reported profits fell to +1 from +4.
- Purchase costs rose at a quarterly rate of 3% in March while retail price growth eased to 0.5% from 0.9%.
- The RBA raised rates to 4.1% in March; it expects higher fuel costs to lift headline inflation to around 5% in Q2.
- Consumer sentiment slipped in April to its weakest level in over two years; appetite for large purchases plunged 15%.
Sectors impacted - energy/fuels, retail and consumer discretionary, and rate-sensitive sectors such as property and services.
Risks and uncertainties
- Higher fuel costs tied to the Iran war may elevate headline inflation toward 5% in Q2, increasing consumer price pressures.
- Businesses face squeezed margins as purchase costs rise and firms appear to struggle to pass those costs through to retail prices.
- Weakening consumer sentiment and a 15% drop in appetite for large purchases risk dampening demand in retail and discretionary sectors.