Australian confidence drops as fuel costs hit sentiment

Business and consumer confidence in Australia fell sharply as fuel prices rose, with CreditorWatch linking the decline to the impact of tensions in the Middle East on oil markets.

The latest NAB Business Survey showed one of the largest recorded drops in business confidence, while the Westpac consumer survey pointed to a marked deterioration in household sentiment.

Business confidence fell 29 points in March, the second largest decline on record. Business conditions were more stable, slipping one point to 6, around their long-term average.

CreditorWatch Chief Economist Ivan Colhoun said that contrast may not last, pointing to a lag between rising costs and the way companies and households adjust their spending and hiring decisions.

Forward orders, often watched as an indicator of future activity, fell 7 points to -1. Purchase costs also rose sharply, with input costs more than doubling in the month to a 3 per cent quarterly rate.

Colhoun said the survey pointed to a clear loss of momentum unless oil prices retreat and shipping through the Strait of Hormuz resumes quickly. A prolonged disruption, he said, would raise the risk of global recession and increase pressure on Australian firms through higher transport and supply costs.

Industry trends

Industry trends were uneven. Mining improved strongly in March after unusually weak readings in earlier months, while Manufacturing and Retail again recorded the weakest conditions.

Finance, Property and Business Services, along with Recreation and Personal Services, remained among the strongest sectors. Wholesale Trade deteriorated, which Colhoun said probably reflected higher transport costs and the early effects of supply chain disruption.

State results were also mixed. Western Australia rebounded from recent weak levels, while Victoria recorded a sharp deterioration.

CreditorWatch said Victoria's weakness may prove a better guide to the direction of other states if energy costs remain elevated. Capacity utilisation edged higher, though Colhoun said this was more likely to reflect labour market tightness than genuine pressure on productive capacity.

Consumer drop

Consumer data painted a weaker picture. Confidence fell 12.5 per cent in April, with higher petrol prices weighing on views of family finances, broader economic conditions and employment prospects.

Westpac's survey, cited by CreditorWatch, showed petrol prices were up 37 cents a litre from March and 77 cents a litre from early February. Colhoun said that increase had pushed consumer sentiment back to levels last seen during the Global Financial Crisis, the early phase of the pandemic and the lows recorded between 2022 and 2024.

Unemployment expectations worsened 9.7 per cent over the month. The biggest deterioration was reported in Construction and Hospitality, two sectors often exposed early when household spending comes under pressure.

CreditorWatch's own Economic Conditions Tracker also weakened sharply across March and early April. All components deteriorated as oil prices increased, pointing to a harsher credit environment and a greater risk of insolvencies.

Rates outlook

Colhoun said central banks would normally look through the initial inflation effects of an energy shock and focus instead on longer-term wage and inflation expectations. Monetary policy cannot address a supply disruption directly, he said, and the duration of the shock matters because interest rate changes work through the economy slowly.

Australian markets are pricing in two more interest rate rises this year, according to CreditorWatch's analysis. Colhoun said that appeared reasonable, given inflation remains above target and fuel costs have added another source of price pressure. But he warned that three rapid increases would be excessive because higher energy prices are already weakening growth.

"Business confidence plunged in March as fuel prices surged, in what NAB noted was the second largest fall ever and reminiscent of similar moves seen in the GFC and COVID pandemic," said Ivan Colhoun, Chief Economist, CreditorWatch.

"A little surprisingly, business conditions were relatively unchanged around their long-term average in March even as fuel prices rose, likely reflecting a reasonably favourable starting point for the Australian economy, but also the fact that consumers and businesses take time to adjust to changes in their economic circumstances," said Colhoun.

"Input costs responded quickly. The direction of travel remains clear and unless there is a relatively swift resolution to the Middle East situation and reopening of the Strait of Hormuz, significantly higher oil prices and global recession threaten, though both might equally reverse in short order if the situation is resolved," added Colhoun.

Household impact

A separate section of the analysis addressed households and credit conditions.

"There was a sharp drop in consumer confidence in April as higher petrol prices affected responses across the survey," said Colhoun.

"The survey reflects renewed cost-of-living pressures on households and also resulted in a sharp deterioration in unemployment expectations. The key remains how quickly the situation in the Middle East is resolved and the Strait of Hormuz reopens," said Colhoun.

"An extended closure threatens very high oil prices and global recession risk. This increased risk was reflected in a sharp deterioration in CreditorWatch's Economic Conditions Tracker, which suggests increased risk of rising insolvencies. Westpac noted the greatest deterioration in unemployment expectations occurred in the Construction and Hospitality industries this month," added Colhoun.