Amid acute cost pressures, Australia’s business sentiment is holding

Amid acute cost pressures, Australia's business sentiment is holding

In April, Australia’s business conditions strengthened further while labor costs and output prices remained elevated. A combination that suggests further interest rate increases ahead to rein in inflation.

Cost pressures remain acute after hitting record levels in March, with quarterly labor costs climbing to 3% and purchase costs hitting 4.6%, the survey showed. Price inflation edged back from record levels in March, NAB said.

Business conditions — measuring hiring, sales and profits — advanced to 20 points in April from a revised 15 the prior month, a National Australia Bank (OTC: NABZY ) Ltd. survey showed Tuesday. Confidence eased by six points to 10, still above the long-run average, NAB said.

“The April survey results show little let-up in the underlying cost pressures,” said Alan Oster, chief economist at NAB. “Price growth eased somewhat in the April survey, but remained high when looking at the history of the survey, supporting our expectation that inflation will remain elevated.”

“The strong business conditions including trading conditions and profitability show that the economy is faring quite well and so far, demand is holding up in the face of higher inflation,” Oster said.

A spike in first-quarter headline inflation to above 5% prompted the Reserve Bank of Australia to begin raising interest rates last week with a larger-than-expected 25-basis-point hike to take the cash rate to 0.35%. Financial markets are pricing in monthly increases through the remainder of the year that would take the cash rate above 3%.

The data showed trading conditions climbed four points in April to 27 points and profitability jumped nine points to 22. Employment was steady while capacity utilization rose to 83.9%.

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