Businesses are poised to offer significant discounts at the shops, according to the National Australia Bank.
Key points:
- A NAB survey suggests businesses are poised to discount their prices as costs fall
- Economists think companies will prioritise gaining market share over boosting profits in coming months
- One investment bank now forecasts an interest rate cut as early as May
A major new NAB survey of roughly 1,000 businesses, from all industries and across the country, suggests Australian businesses are becoming worried enough about losing customers that shoppers can soon expect to be paying significantly less at the check-out.
"So we're seeing quite a big cutback," NAB's chief economist, Alan Oster, told the ABC.
The pandemic, and the huge supply chain bottlenecks that came with it, sent business costs soaring.
Businesses passed on those costs to customers, and inflation took off.
But now that supplies are clearing up and those pressures are easing, businesses are beginning to discount retail prices as their costs come down.
"Cost and price growth measures continued to moderate gradually," NAB noted in the survey results.
"Purchase costs grew at 1.2 per cent (down from 1.4 per cent in Q3).
"Labour cost growth was 1.2 per cent (from 1.8 per cent in Q3).
"Final product price growth was 0.7 per cent q/q (down from 0.9 per cent in Q3) with retail price growth easing to 0.9 per cent (down from 1.1 per cent)."
Loading...And Mr Oster said the lower prices are already hitting company bottom lines.
"Where you see it most is we have a measure of profitability," he said.
"Think of the long run-index levels of around plus-six, plus-seven sort of thing.
"Profitability in the September quarter was plus-11 and in December it was plus-five, and you get negative numbers when you talk about retail profitability."
Short-term outlook a concern
So why would businesses, all of a sudden, be dropping prices at the expense of profits?
Mr Oster says it's because they're increasingly prioritising hanging onto market share, or keeping customers, rather than growing their profits.
"We ask questions about the outlook, and what we've seen for the next three months is quite a big reduction in expectations for business conditions."
"Expected business conditions fell to +12 index points at a 3-month horizon, down from +17 index points in Q3, and forward orders turned negative at -3 index points," the NAB survey results noted.
"Capacity utilisation fell but remained elevated at 83.5 per cent."
Capacity utilisation refers to whether businesses are operating in top gear.
"It's telling me business is basically worried about the short-term outlook," Mr Oster said.
He believed it was all the inevitable result of rising interest rates.
Eventually, shoppers, weighed down by ever-increasing rents and mortgage repayments, start to look for bargains, and once profit-hungry businesses start offering those bargains up.
"You see it in things like household goods," he said.
"[Businesses] can't get their lounges and couches and all that sort of stuff off the shelf. You can't sell them, so therefore you discount them."
Rate cuts may follow — but when?
All of this is good news for those worried about inflation — notably the Reserve Bank.
The obvious question, then, is when might the RBA see fit to cut interest rates?
Investment firm Deutsche Bank said a 0.25 percentage point rate cut in May was "a material possibility".
But Mr Oster said that would be too soon.
"I think the Reserve Bank will want to see where the labour market is — they will want to see what the impact of tax cuts are," he said.
"I personally don't think they'll have any impact, but they will want to see.
"So I think it's more likely that you're going to have [interest] rate cuts but not starting until the end of the year, so we've got them temporarily in November."
Economist Rae Dufty-Jones agreed with those predictions.
"Inflation is certainly slowing," she said.
"There are a few things that remain to be seen in terms of the impact of the price of energy, which is a major contributor to the cost of business, and of course the implications for the changes to the stage 3 tax cuts and what that might mean for inflation as well."
And just on the stage 3 tax cuts, to get the changes through parliament the government needs support from either the opposition or the Greens.
The Greens want an increase to JobSeeker payments in return for their vote -- an idea the prime minister appears lukewarm about.
"We'll always look at budget measures, but what we won't be doing is trading across different issues," Prime Minister Anthony Albanese said.
"We're focused on this; this stands on its merits."