Statement on Monetary Policy – August 2024Box B: Insights from Liaison

Recent liaison discussions suggest that consumer demand remains subdued. Home building activity is expected to decline and some firms have scaled back their investment plans for the year ahead. Nevertheless, growth in wages, non-labour costs and selling prices has not eased much in recent months and remains higher than the long-run averages. Goods firms (i.e. firms producing, distributing and selling goods) expect their selling price inflation to slow noticeably over the year ahead but remain above its long-run average. Services firms expect little change in their selling price inflation over the next 12 months. Firms have been focusing more on cost management over the past 12 months, aiming to improve productivity and maintain or rebuild margins. Consistent with this, firms’ hiring intentions for the year ahead are a little below their long-run average and there has been a small increase in the share of firms intending to decrease headcount.

Consumers are price sensitive and cutting back spending in some areas.

Households are generally budget-conscious, trading down to cheaper items, concentrating spending in promotional periods and reducing non-essential spending. Retailers and hospitality firms generally report that underlying demand remains subdued (Graph B.1), although a recent increase in retailers’ promotional activity has lifted sales revenues. Retailers’ expectations for the year ahead are mixed; some retailers expect current conditions to persist for some time, while others are expecting a gradual improvement in spending following tax cuts, lower inflation and continued strong wages growth.

While the number of domestic tourism trips has not changed much over the past year, domestic tourism spending has declined in 2024. Households have chosen to take shorter holidays closer to home and reduce expenditure on experiences, tours and eating out. In contrast, tourism contacts report that demand from overseas visitors continues to increase and is expected to reach pre-pandemic levels over the next year or so.

International student commencements have declined at some higher education providers, reflecting changes to student visa eligibility and an increase in visa refusals. While there is considerable uncertainty around the outlook, contacts generally expect a decline in international student commencements at universities in the year ahead. In response, some educational institutions are seeking to reduce costs, investment and/or staff numbers. Domestic university student numbers remain lower than a few years ago, as more people choose to work rather than study given the still-strong labour market and higher cost of living.

Community service organisations report that demand for their services remains much higher than before the pandemic, due to cost-of-living pressures and a shortage of affordable housing. Contacts report that they are now supporting a broader range of clients, including dual income households and those with mortgages who are often seeking support for the first time. Clients are increasingly presenting with multiple and often interconnected personal and financial issues. Contacts expect this heightened demand to continue in the period ahead.

Home building is expected to slow further.

Most builders of new detached homes expect their workload to slow over the year ahead, as they complete their backlog of projects and have fewer new builds to commence due to weak sales over the past 18 months. Contacts believe that there is still considerable underlying demand for new housing, but it has not flowed into sales due to potential buyers’ concerns about affordability and uncertainty about the outlook for the economy and interest rates. There is, however, considerable variation across states because of factors such as population flows and relative affordability; conditions in Western Australia are the strongest. Looking ahead, most contacts do not expect further falls in new home sales and suggest that they will gradually increase once buyers perceive that interest rates have stabilised.

Construction activity for new apartments has slowed significantly and many planned developments are on hold due to the high costs of construction (relative to the prices that buyers are willing to pay). Contacts expect construction costs to continue to increase, although at a slower pace than over the previous year. While the pace of growth in materials costs has slowed and supply chains have normalised, the cost and availability of labour remains a challenge in some areas. This is particularly the case for high-density projects that compete for labour with similar skills to those required by the large volume of infrastructure projects. Contacts also attribute higher construction costs to a decline in productivity, construction delays and the higher cost of finance.

Investment intentions have softened but remain around average levels.

Liaison contacts increasingly report that they plan to reduce investment in the year ahead. Some firms are pulling back on their planned investment due to high construction costs, a subdued outlook for demand and broader macroeconomic uncertainty. However, investment intentions for the year ahead remain around average levels overall, supported by infrastructure, renewables, industrial building, and digital transformation projects.

Some firms expect growth in engineering construction to moderate over the year ahead as infrastructure projects are completed and planned projects are delayed. Overall though, there remains a solid pipeline of work that is underway or expected to begin soon, particularly in the public and energy sectors. Firms continue to express concerns around the capacity of the construction industry to deliver some of these projects, particularly in smaller capital cities and regional areas, which may result in further delays and cost escalation.

Growth in costs and selling prices remains elevated and has been little changed in recent months.

Liaison contacts suggest that wages growth has been little changed over recent quarters (Graph B.2). Most firms expect stable or slower wages growth in the period ahead as they anticipate further easing in inflation and labour market conditions. Lower award rate outcomes in 2024 than in 2023 will also contribute to slower wages growth for some firms. Nevertheless, wages growth over the coming year is generally expected to remain above its long-run average.

Growth in non-labour costs is slower than a year ago but remains above its long-run average. For goods-related firms, growth in non-labour costs eased from post-pandemic highs as international supply chains recovered, but has levelled out over recent months. Growth in non-labour costs for services firms also looks to have peaked but remains elevated. Within overall non-labour costs, goods and services firms continue to single out higher logistics, energy and insurance costs.

In aggregate, growth in selling prices has been little changed over recent months and stronger than firms expected a year ago. Goods firms generally expect their selling price inflation to slow noticeably over the year ahead but to remain above its long-run average. By contrast, household and business services firms expect growth in their selling prices to be little changed over the year ahead. Firms have been focusing more on cost management over the past 12 months, aiming to improve productivity and maintain or rebuild margins, given cost growth is still relatively high and it is reportedly becoming more difficult to pass cost increases through to prices.

Hiring intentions have eased and labour availability has improved over the past year, but firms say that recruitment remains challenging.

Growth in firms’ headcount has continued to slow. Hiring intentions for the year ahead are a little below their long-run average and there has been a small increase in the share of firms that intend to decrease headcount (Graph B.3). The easing in labour demand over the past year has been most notable for consumer-related contacts such as retailers, wholesalers and household services firms, as well as mining and some construction contacts. Voluntary staff turnover rates have fallen, and labour availability has risen, compared with a year ago. Despite this, contacts indicate that the labour market remains fairly tight, as staff turnover rates are still generally above average and finding suitable labour continues to be difficult for many firms.