Australian business momentum slows at start of 2026

The decline was led by trading conditions, which dropped six points to +10, slipping two points below their long-run average. Profitability also weakened, falling three points to +5, indicating that firms are absorbing softer demand through tighter margins. In contrast, the employment index remained steady at +5 for a third consecutive month, an above-average outcome that aligns with official data suggesting a pause in labour market easing, Westpac said in an article by economist Luka Belobrajdic.

Capacity utilisation edged lower to 82.9 per cent in January, down 0.6 percentage points from its November 2025 peak. Although the measure can be volatile, the continued easing is notable given the Reserve Bank of Australia’s focus on capacity constraints as a source of inflationary pressure. Capital expenditure also softened slightly, falling one point to +9, though it remains above its long-run average.

Forward-looking indicators were more encouraging. Forward orders returned to positive territory, rising three points to +2, supported by a sharp reduction in inventories. Stocks fell 12 points to -1 in January, reversing December’s significant build-up and potentially providing a lift to future demand.

Business confidence showed tentative signs of recovery, rising one point to +3. Although still below its historical average, the reading suggests firms are becoming less concerned about the prospect of further monetary tightening compared with households, whose sentiment remains weaker.

Cost pressures continued to ease across the board. Labour cost growth slowed by 0.5 percentage points to a quarterly pace of 1.3 per cent, while final product price growth eased 0.3 percentage points to 0.5 per cent, the lowest level since 2021. Purchase cost growth also moderated, falling 0.2 percentage points to 1.1 per cent.

The moderation in costs and prices supports expectations of a more favourable near-term inflation outlook, reinforcing the view that recent upside surprises in official inflation data may have been driven largely by temporary factors.

ALCHEMPro News Desk (SG)