Australian business conditions rose to a record level in October and the underlying details suggest that positive employment outcomes will persist over the near term, explains Daniel Gradwell, Senior Economist at ANZ.
“These encouraging indicators support our view that wages and inflation will slowly but steadily improve from here, and we continue to expect the RBA will increase the cash rate twice in 2018.”
“Australian business conditions leapt to a record high in October, extending the trend improvement that has been underway for the best part of four years.”
“The details of the report were similarly positive. Of particular interest is the sharp increase in reported profitability, which is a useful leading indicator of demand for labour, and subsequent employment growth. We have previously noted that the strength in the official labour market data – with annual employment growth now running at 3% y/y and the unemployment rate falling to a four year low of 5.5% – has potentially overshot leading indicators, such as profitability and job ads. But this strong business report suggests that there is still room for further solid employment results through the remainder of 2017 and into 2018.”
“The strength in business conditions provides a welcome offset to pessimism about the outlook flowing from the recent weakness in retail sales. While it is hard to see the current level of conditions rising further or even stabilising at these levels, the outlook for employment is certainly positive. The next step in this process will be to see some improvement in wages, so we will be watching tomorrow’s wage data closely. We continue to believe that Australia is moving past the trough of wages growth and inflation, and subsequently we expect the RBA will eventually look to reverse the additional stimulus it injected in 2016 and so take the real cash rate back to zero.”
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