RBA may hike again as business & consumer strain grows

CreditorWatch Chief Economist Ivan Colhoun said new business and consumer survey data point to growing strain on Australian businesses and households, supporting the case for another Reserve Bank of Australia rate rise followed by an extended pause.

He linked the deterioration in sentiment and conditions to higher fuel prices, persistent cost-of-living pressure and rising expectations of tighter monetary policy.

The latest NAB Business Survey showed business conditions fell five points to -1 in August, the first negative reading since the pandemic. Colhoun said negative business conditions readings are unusual, although -1 does not indicate a severe contraction.

He said the pattern across sectors suggested fuel costs played a significant role in the decline. Construction, Manufacturing, Retail Trade, and Recreation and Personal Services recorded the largest falls, sectors he said were most exposed to the combined effect of higher interest rates and fuel prices.

Profitability also dropped sharply in August, with businesses still reporting elevated purchase and labour costs alongside retail price growth. Forward orders improved slightly, but Colhoun said profitability weakened across a broad range of industries, especially those under pressure from weaker discretionary spending and higher transport-related costs.

Capacity utilisation eased overall and has been broadly flat over the past year, though it remains relatively elevated. Colhoun said capacity use fell sharply in Construction, Wholesale Trade and Retail Trade, while Mining and Transport and Utilities rose.

State data also showed uneven conditions across the country. Western Australia and Victoria posted sharp falls in business conditions, with Victoria giving back what Colhoun described as a likely temporary lift. Queensland and New South Wales had already been reporting steadily weaker conditions in recent months, he said, while Western Australia still had the strongest reading of any state despite the latest drop.

Consumer pressure

Separate figures from Westpac showed consumer sentiment fell 5.2% in September, reversing most of the 6% rise recorded in August. Confidence remained well below year-earlier levels, with household finances a key source of concern.

Colhoun said the family finances component fell 9.2% over the month, consistent with ongoing pressure from inflation and household bills. He cited higher petrol prices and expectations of another rate increase as key reasons for the decline, particularly among mortgage holders.

Sentiment among homeowners with a mortgage fell 14% over the month, while renters were relatively unchanged. Colhoun said the survey suggested households carrying debt were more exposed to shifting interest-rate expectations and rising daily costs such as fuel.

Labour market expectations also weakened. The unemployment expectations index rose 2.8% in September and was 6.1% higher than a year earlier, with Construction and Hospitality workers showing a more pronounced deterioration.

Colhoun said that measure had been volatile and should be read alongside other indicators. He noted that ANZ Indeed job ads rose 2.5% in August to the highest level since April 2024, while the larger SEEK series did not show the same move.

Rate outlook

The combination of weaker activity data and persistent cost pressure leaves the RBA facing conflicting signals. Colhoun said the central bank had recently shown greater concern about delaying inflation's return to target, even as business and household surveys point to a softer economy.

"With input and labour costs continuing to rise at rates well above those consistent with the return of inflation to target, this suggests the Board will need to make the unpopular decision to tighten interest rates again in September as the upside inflation risks it has been discussing materialise. The good news is that interest rates will likely remain on hold for a considerable time afterwards," Colhoun said.

He said the consumer data also reinforced the extent of pressure already being felt by households. "The consumer sentiment survey continues to reveal pressure on household family finances, this month attributed to expectations of further interest rate increases and higher fuel prices, in part due to the end of the government's fuel excise subsidy. With the upside inflation risks the RBA has warned about likely to become reality, a further interest rate rise by the RBA in September will add further pressure to both households and consumers," Colhoun said.

Colhoun added that weaker confidence among mortgage holders and slightly deteriorating unemployment expectations argued against any quick follow-up move after a September increase.

"The survey reveals slightly deteriorating unemployment expectations and weaker confidence among those with mortgages, which to me suggests there is no need for the RBA to quickly follow up the likely interest rate rise in September," he said.