Wage growth, skills shortages and higher rates hurting business

Rising interest rates, wages growth and higher fuel costs made life significantly tougher for Australian business in the first three months of 2008, the NAB Quarterly Business Survey has found.

Business conditions suffered their largest quarterly fall in more than seven years in the three months to March. The NAB Business Conditions Index now sits on 13 points, its lowest level since mid-2006.

The biggest fall in business conditions were in sectors exposed to the credit squeeze or to the shaky consumer sector, with financial services, property services, wholesaling and retailing – especially food and household goods – being squeezed the hardest.

The only sector to improve its position during the March quarter was manufacturing, thanks largely to a big pick up in equipment manufacturing.

The skills shortage also continues to put businesses under pressure, with 72% of businesses saying a lack of labour is constraining on further growth.

Wage costs lifted by 0.9% for the quarter. The annual rate of 3.5% is at its highest level in several years, particularly in the mining, construction and finance, business and property services sectors.

And the outlook? More tough times to come. Business owners have significantly downgraded their outlooks both for the next three months and the year ahead, pushing the NAB Business Expectations Index to a five year low of 27 points.

A key source of that pessimism stems from the interest rate outlook, with 84% of business respondents to the survey saying they expect interest rates to rise in the short term.