Statement on Monetary Policy – November 2024Box C: Insights from Liaison

Recent liaison discussions suggest that demand from households remains subdued. Investment intentions for the year ahead remain above average but have been wound back in recent months. Contacts report that it has become easier to fill vacancies and voluntary staff turnover rates have declined over the past year, but it is still harder to find and retain suitable labour than before the pandemic. While growth in employment has picked up a little in recent months, hiring intentions for the year ahead have continued to ease. Wages growth and selling price inflation continue to ease gradually, and contacts expect a further modest decline over the year ahead.

Household spending remains subdued.

Households remain budget conscious, reducing non-essential spending, trading down to cheaper items, shopping around more to compare prices and waiting for items to go on sale. Retailers continue to report that trading conditions remain subdued, though a few have reported a marginal improvement in conditions since September. Budget-conscious consumers are generally expected to respond well to promotional events in coming months, such as the Black Friday and Boxing Day sales. Contacts also report subdued demand in hospitality, entertainment and tourism. Households are spending less on experiences and eating out and choosing more affordable options for their holidays.

Community service organisations continue to report that demand for their services remains much higher than usual, due to cost-of-living pressures and a shortage of affordable housing. Contacts expect this heightened demand to continue in the period ahead.

Conditions in the higher education sector have softened over the past year. While domestic university student enrolments have picked up a little recently, international student commencements have declined at some institutions as fewer visas have been approved. The cap on international student commencements is expected to further reduce new enrolments in 2025. In response to this weaker outlook, some providers are reconsidering investment plans and/or staffing requirements.

Detached home building activity is expected to stabilise or pick up over the year ahead, while apartment construction is likely to remain weak.

Builders of new detached homes have generally seen their workload slow in 2024, but many contacts are cautiously optimistic about the outlook for the year ahead. Contacts suggest that demand is likely to pick up when buyers have more certainty around the outlook for interest rates, and most contacts expect new home sales to either stabilise or pick up over the next 12 months. There is, however, considerable variation in conditions across states because of factors such as population flows, relative affordability and policy changes. Builders in Western Australia, South Australia and Queensland report relatively stronger conditions and are more confident about the outlook for sales, whereas builders in New South Wales and Victoria are experiencing relatively weaker demand and express more uncertainty around the outlook.

Apartment construction activity remains low and is expected to continue to be subdued in the year ahead. Many potential developments are currently on hold as they are not considered financially feasible because construction costs are too high relative to selling prices. Contacts attribute high construction costs to both labour and materials, a decline in productivity, prolonged build times and the cost of finance. While inflation in materials costs has slowed, the cost and availability of labour remains a challenge in some areas.

Investment intentions have continued to soften but remain above average.

A growing proportion of firms report that they plan to reduce investment in the year ahead, though overall investment intentions remain above average. Firms reducing their investment attribute this to cost pressures, a weak demand outlook and broader macroeconomic uncertainty. Contacts that report stronger investment plans for the year ahead tend to be investing in new industrial buildings, renewable energy infrastructure, automation and software.

Some firms expect engineering construction to moderate over the year ahead. This is because a few large public transport infrastructure projects have been completed, descoped or deferred, and fewer new projects have been announced. Renewables investment has also been slower to ramp up than many contacts had expected. There continues to be a significant pipeline of infrastructure work to keep many larger engineering firms busy, but some smaller firms are having to compete more intensively than in recent years.

Hiring intentions for the year ahead have continued to ease.

While employment growth among liaison contacts has picked up a little over the past quarter, employment intentions for the year ahead have drifted lower and are below their long-run average. Contacts attribute the easing in hiring intentions to a greater focus on cost containment and their efforts to improve productivity, or to weaker demand. While most contacts expect headcount to remain stable or increase a little, a growing number of contacts expect headcount to decline over the year ahead (Graph C.1). Many of these organisations are not planning layoffs but where possible would like to avoid replacing staff who leave voluntarily.

Contacts report that labour availability has improved further over recent months and voluntary staff turnover rates have continued to decline. An increasing number of contacts report that it has been easier to fill positions compared with the same time last year, with improvements noted in both the quantity and quality of candidates. However, contacts indicate the labour market remains tight relative to the period prior to the pandemic and finding suitable labour remains a challenge for many organisations, particularly in the smaller states and in regional areas.

Growth in wages and selling prices continues to ease gradually.

Liaison suggests that wages growth has slowed a little over recent quarters (Graph C.2). Most contacts expect wages growth to continue to moderate gradually over the year ahead, as inflation continues to ease and labour market conditions soften further.

The pace of growth in non-labour costs is similar to a year ago, for both goods and services firms. A number of contacts have reported increasing costs related to managing compliance and regulatory obligations. Services firms generally expect growth in their non-wage costs to remain above average over the year ahead; this largely reflects an expectation of continued strong growth in fees from labour-intensive suppliers, such as contractors, consultants and software providers. Goods firms expect growth in their non-labour costs to slow over the year ahead, as the general easing in inflation and the more subdued demand environment lessens upward price pressures from their suppliers.

Inflation in selling prices has eased for both goods and services firms over the past year. Contacts generally expect selling price inflation to decline modestly over the year ahead, though the extent of easing is expected to be more gradual than was the case at the time of the August Statement.