Statement on Monetary Policy – May 2024Box A: Insights from Liaison

This Box highlights key messages collected by teams based in Adelaide, Brisbane, Melbourne, Perth and Sydney during discussions with around 230 businesses, industry bodies, government agencies and community organisations over the period from the beginning of February 2024 to the end of April 2024.

Recent liaison discussions suggest that demand conditions have been little changed since the end of 2023, and economic activity is not expected to grow much in the period ahead. Given the current high-cost environment, some firms have scaled back their investment plans, though the outlook for investment in infrastructure remains strong. Firms are reporting that it is becoming more difficult to pass cost increases through to prices and have increased their focus on cost discipline and/or improving productivity. Growth in wages and prices is expected to moderate further over the year ahead.

Consumer spending remains cautious and price sensitive.

Retailers generally report that sales volumes have been little changed in recent months, although most discount retailers have seen a lift in sales. Households are budget-conscious and seeking value. Consumers have been trading down to cheaper products, reducing non-essential purchases and concentrating their spending during promotional periods that offer potential savings. Retailers generally expect current conditions to persist over coming months, with overall sales volumes little changed.

Demand for domestic travel improved in the first few months of 2024, supported by entertainment events, though contacts report that consumers remain cautious in their spending because of cost-of-living pressures and high travel prices. Contacts generally expect domestic tourism demand to be unchanged over the next 12 months.

Community service organisations report that demand for assistance remains very strong for all their services across metropolitan, regional and remote areas. Cost-of-living pressures and the lack of housing availability and affordability are key drivers of this demand. Contacts continue to see requests from people who have not previously sought assistance, including wage earners and those with mortgages. People are also increasingly needing support with a more complex range of interconnected personal and financial issues, so community organisations need to spend more time with each person.

International student intakes are expected to grow at a slower pace or even decline over the year ahead.

Underlying international demand for education in Australia remains strong, following exceptionally strong growth in commencements in 2023. However, universities report that changes to student visa eligibility and slower visa processing times have limited commencements at some institutions in 2024 so far. There is considerable uncertainty around how student visa settings will impact commencements going forward, but contacts generally expect international student commencements to grow at a slower pace or decline in 2024 and 2025. In response, some institutions are seeking to reduce costs, investment plans 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.

International tourism has picked up but remains below pre-pandemic levels. Liaison contacts expect international visitor arrivals to reach pre-pandemic levels over the year ahead.

Home building is expected to slow as builders work through their backlog of projects.

Sales of house and land packages have been fairly stable in recent months, at low levels. There is considerable variation across the country, reflecting factors such as population flows and relative affordability. Demand for off-the-plan apartments is low. Contacts are cautiously optimistic about the outlook, and generally expect demand for new homes will pick up as buyer perceptions of interest rate stability and affordability improve.

Most detached home builders expect their workload to decline in coming months as they work through their backlog of projects, due to the lower sales in 2023 and in 2024 so far. New apartment construction has already declined. Many high-rise residential developments are stalled or not going ahead due to the high costs of construction relative to apartment sale prices and capacity constraints in the construction industry. While the pace of construction cost growth is easing as material costs improve and supply chains normalise, the cost and availability of labour remains a challenge, particularly for high-density projects that compete with the large volume of infrastructure projects for similar skills.

Investment intentions have declined to their long-run average level.

Firms’ investment intentions eased in early 2024, to be around their long-run average level. Firms that have pulled back on planned investment spending attribute this to higher construction costs and uncertainty around the economic outlook. For those firms that are investing, many contacts typically point to projects related to technology, digitisation and automation.

A strong pipeline of infrastructure work, particularly in the public and energy sectors, is underway or likely to begin soon. Firms continue to express concerns around the capacity of the construction industry to deliver these projects (particularly in smaller capital cities and regional areas), which may result in delays and further cost escalation.

Firms are intensifying their focus on containing costs as they find it harder to increase prices.

Firms have increased their focus on cost management over the past 12 months to improve productivity and maintain or rebuild margins, in an environment where cost growth is still relatively high and it is becoming more difficult to pass cost increases through to prices. The approach taken to managing costs and/or improving productivity varies considerably by firm and industry. Examples include reviewing staffing structures, converting contractors or casuals to permanent staff, changing working or opening hours, and considering offshoring for some roles. Firms have also been investing in labour-saving technology, such as introducing automation and robotics. This recent boost to firms’ investment in technology will not necessarily lead to higher productivity though, at least in the near term. For example, some of the investment is focused on risk mitigation, and transition costs often weigh on productivity in the early stages of the adoption of new technology.

Despite firms’ focus on cost management, hiring intentions have been relatively stable in recent months and are around their long-run average (Graph A.1). Labour availability has improved over the past 12 months; voluntary staff turnover rates have declined and many firms have noted that it is somewhat easier to fill vacancies. However, the labour market remains tighter than prior to the pandemic; staff turnover rates are still above average and finding suitable labour continues to be difficult for many firms.

Graph A.1
A two-panel line graph showing employment intentions of firms in RBA’s liaison program from 2003. The first panel shows that the share of firms intending to expand headcount over the year ahead has increased a little in recent months while the share looking to reduce headcount declined a little. It also shows the share of firms intending to keep their headcount unchanged has been steady and accounted for nearly half of all firms. The second panel shows that the net balance between the share of firms intending to expand headcount and the share looking to reduce headcount has increased in recent months and is currently around the long-run average level.

Average wage growth across private sector contacts in the liaison program was just above 4 per cent over the year to the March quarter. Most firms expect stable or slower wages growth in the period ahead, with contacts’ average year-ended wage growth expected to be around 3½ per cent over the next 12 months. Contacts attribute this easing to their expectation that inflation and award rate outcomes will be lower in 2024 than in the previous year, and that the labour market will soften further.

Many firms report a gradual easing in the pace of growth in non-labour costs over the past year, particularly for imported goods, but note that overall input cost growth remains unusually high due to increases in domestic costs such as logistics, energy, insurance and labour (Graph A.2). Firms expect overall cost growth to continue to moderate over the next 12 months.

Graph A.2
A line graph that shows a net balance measure (with firms reporting above-average increases counted as positive and those reporting decreases, no change or below-average increases counted as negative) for the expected selling prices, and domestic and imported costs of firms in the RBA’s liaison program. Firms are reporting imported costs and expected prices as growing more slowly than ‘average’, but face more than ‘average’ domestic cost growth.

As demand has softened, a growing number of firms have noted that their customers along the supply chain have become less accepting of attempts to pass on cost increases to prices. Contacts expect to increase their prices by less over the next 12 months compared with the prior 12 months.