According to NAB’s latest survey on the Australian business environment, conditions within the economy appear strong. Confidence and investment measures have seen significant improvements – so too have profitability, sales, and employment indices. The latest figures suggest that unemployment may dip below 4% for the first time since the early 1970s.
But not everything is peaches and cream. With the economy currently red-hot, input costs are no stranger to the blaze:
- Purchase costs for businesses are up 1.5ppt, now at 4.2% quarter on quarter (q/q)
- Labour costs have also increased by 50%, up to 2.7% q/q
These effects leave businesses with two choices:
1. Absorb the increased costs and maintain their prices, or
2. Pass-through these costs to consumers
NAB’s index shows that retail price growth has almost doubled to 3.7% q/q – demonstrating businesses have stopped the bleeding on their profit margins. So long as their customers are sticky, this pass-through of price increases should not result in a loss of market share. This is likely the case as inflationary expectations at 5.8% suggests customers see no alternative – a sigh of relief for businesses who can no longer absorb increasing input costs. Further strengthening businesses’ opportunity to increase prices with no backlash is a cash splash within the recent federal budget, easing cost of living pressures.
Not quite. With CPI expectations for the March quarter ever-increasing, a premature rate hike from the RBA in May as opposed to June is not off the table. Despite price hikes being largely supply-driven, the central bank will still attempt to put a lid on inflation with the tools they have available. Higher interest rates will put downward pressure on profit margins once more, meaning an ill-equipped business will feel the pain.
The ability to service debt only becomes more difficult as rates rise. So now more than ever is the time to ensure your business’s debt facilities are not only tailored to your needs, but are also ironclad to weather the possible storm forming on the horizon.
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