Statement on Monetary Policy – May 2025Box C: Insights from Liaison

Firms generally report little change in domestic economic conditions over the past few months, with retailers continuing to report slow to moderate growth in demand. Headcount at most firms was relatively stable and is expected by firms to remain so. Labour availability continued to improve. Firms continued to report above-average increases in output prices over recent months but expect them to slow over the next 12 months, particularly for the services sector. Firms note that the recovery in domestic demand growth has so far been slower than hoped but they remain cautiously optimistic that growth will gather pace from here, despite heightened concerns about the risks to the outlook from global developments.

Firms in liaison report that changes to global trade policies have so far had little direct effect on revenue, their decisions or their prices. However, their uncertainty increased noticeably over recent months ahead of the Australian federal election and amid the unpredictable policy environment abroad.

Firms reported elevated uncertainty about the domestic and global outlook.

The RBA’s text-based liaison uncertainty index – which captures uncertainty expressed by firms in the liaison program – was higher in April than at any time since the global financial crisis (Graph C.1).¹ The key issues on firms’ minds in discussions were heightened uncertainty related to trade, tariffs and other policies since the change in government in the United States, and uncertainty due to the federal election in Australia in the months preceding it. Following the federal election, early indications for May suggest some easing in uncertainty.

Firms see risks in both directions for their activity and prices, highlighting the extent of uncertainty about the global environment. Some firms have noted potential opportunities in the period ahead. For example, some exporters have noted upside risks to demand for Australia’s exports where they become cheaper relative to other countries that face higher US tariffs (such as for some agricultural products) or where there is reduced competition from the United States (such as for tertiary education). Additionally, some liaison contacts have noted tentative signs of increased foreign appetite for real investments in Australia because investors are reassessing the relative jurisdictional risk of Australia compared with the United States. However, some exporters are concerned that lower global growth could weigh on demand and commodity prices, and in turn their sales revenue.

Some firms hope that a reduction in US demand for goods could flow through to an easing in imported costs for Australian firms due to lower global aggregate demand relative to supply. Other firms are concerned about upside risks to imported costs should the Australian dollar depreciate. The outlook for the exchange rate is a concern raised by many retail, manufacturing, wholesale, finance and services firms.

Many firms report that it is still too early to assess the full implications for their business from geopolitical developments and elevated uncertainty. While many firms are watching developments closely as part of their forward planning, firms have generally emphasised that they have faced few direct effects from these developments so far, and the overall tone in liaison has suggested the Australian economy has remained fairly stable over recent months.

Firms have mostly kept headcount stable and expect this to remain the case over the next 12 months.

The share of firms reporting that their headcount was stable over the past year has increased recently, as has the share intending to keep headcount stable in the year ahead (Graph C.2). Firms intending to keep headcount stable are generally reporting that they need to maintain existing capacity or are planning to restructure to try to achieve more with the same size workforce. Voluntary staff turnover continues to normalise, and firms are more easily able to find the workers they need than has been the case for some time.

These outcomes are at the margin a little softer than a few months ago; since then, the share of firms that had increased their headcount or intended to grow headcount over the next 12 months has eased a little. This suggests there has been a slight easing in intentions for further employment growth. Of those firms that have reported reducing their headcount over the recent period, the majority had let headcount decline through natural attrition or reducing non-revenue generating roles. A large share of firms that recently reported they had reduced headcount over the past year said they do not expect to reduce headcount any further over the year ahead. Around half of contacts intend to keep their headcount stable.

Price and cost outcomes for firms were little changed over the recent period and their price growth is currently expected to slow gradually.

Whether geopolitical events lead to higher or lower imported cost inflation will be an important determinant of firms’ pricing pressures over the period ahead. In the first few months of 2025, firms noted concerns that the lower level of the Australian dollar since mid-2024, relative to the prior period, would put upward pressure on their cost growth over the period ahead, particularly if it continued (these concerns have abated more recently, in line with exchange rate movements). Firms continue to report above-average growth in energy prices and business insurance and technology costs, particularly subscription costs. Partly offsetting this, growth in construction costs is normalising, insurance cost growth is coming down and there are tentative signs growth in rates for land and sea freight and some technology costs will slow over the period ahead.

Investment and consumption activity indicators have overall been relatively steady, though a cautiously positive tone has persisted among some contacts regarding the domestic outlook.

Investment intentions have been stable over recent months. Most firms report that they are planning to spend as much over the next 12 months as they had over the past 12 months. The share of firms looking to lower their investment over the year ahead has declined a little. For other firms, the level of construction costs has been a commonly cited factor weighing on investment intentions. Contacts report they expect softer growth in investment in vehicles, industrial property and new office space. Few firms have reported any changes to their investment plans in response to geopolitical tensions overseas, though uncertainty around domestic energy policy over the early part of this year was noted in some cases to be weighing on their energy investment decisions.

Information from residential construction firms suggests that completion of projects outstripped new sales and as such their pipeline for future activity has declined. Homebuilders have reported a moderate increase in speculative building activity – that is, building homes that are not pre-sold – over the past year, which has provided some support for activity. Most homebuilders expect to see a boost in home sales after the federal election and if there are further cuts to interest rates. That said, contacts remain concerned about affordability constraints.

Retailers continue to report slow to moderate growth in demand over recent months, consistent with a gradual recovery in private demand. Firms have so far seen little discernible reaction from consumers to the February interest rate cut. An increase in domestic student commencements for some universities and a further recovery in international tourism have also supported a cautiously positive tone persisting among some contacts recently regarding the domestic economy, despite rising concerns about the risks to the outlook from global developments.

Endnote

The business liaison uncertainty index is a text-based index that uses a dictionary of words that relate to uncertainty and the corpus of liaison meeting notes that record the views expressed by firms in meetings conducted as part of the RBA’s liaison program over almost 25 years. 1