Statement on Monetary Policy – February 2025Box D: Insights from Liaison

Since the November Statement, liaison contacts across a range of industries have reported that economic conditions have picked up a little and an increasing number of firms are observing signs of improving demand (Graph D.1). Household spending remains subdued but has lifted since mid-2024. Investment intentions for the year ahead are around average. Firms reported an increase in employment in recent months and while their hiring intentions for the year ahead have also picked up, they are still a little below average. Firms report non-labour cost growth has been little changed in recent months and remains elevated. Wages growth has slowed and is expected to slow further over the year ahead, but also remains above its long-run average. Overall, firms generally report that growth in costs has been above growth in selling prices, with many firms reporting downward pressure on margins. Selling price inflation has eased over the past year, but contacts do not expect growth in their selling prices to ease much further over the year ahead. By state, economic conditions are softer in New South Wales and Victoria than in Queensland, South Australia and Western Australia.

Household spending has picked up a little, though conditions remain challenging for many retailers and household services firms.

Retailers report that trading conditions have improved since mid-2024. However, conditions remain challenging as consumers are still very price conscious, shopping around to compare prices and waiting for items to go on sale. There was strong participation in Black Friday promotions, though this partly came at the expense of sales in the rest of December.

Demand in the hospitality and tourism industries has also picked up in recent months. Nevertheless, households are still choosing more affordable options for their holidays, spending less and trading down to cheaper options when eating out. International tourism has also been slower to recover than many contacts expected a year ago.

International student commencements declined at some universities in 2024, reflecting changes to government policies and visa processing times. Contacts are very uncertain about the outlook for international student enrolments in 2025, reporting that some prospective students are preferring to apply to other countries given higher uncertainty about whether they will be granted a place in Australia.

Community service organisations continue to report strong demand for assistance, as they did throughout 2024. This is most frequently attributed to the higher cost of living and a lack of affordable housing. These organisations continue to support a broader range of clients than was the case a few years ago, including many people who are seeking assistance for the first time. Contacts have highlighted the challenges posed by the heightened demand for their services and expect this to continue over the year ahead.

Home building activity is expected to fall in the near term, but builders are cautiously optimistic about the outlook.

Home builders generally expect a decline in their building activity over the year ahead as the completion of homes currently under construction outstrips new home sales. Builders report that sales of new detached homes have remained below average in New South Wales and Victoria in recent months. Demand and sales in Western Australia, South Australia and Queensland remain stronger than other parts of the country. Builders tell us that they expect their sales to improve if interest rates are reduced.

Shortages of finishing trades (such as painters and tilers) are still constraining building activity, although the availability of starting trades (such as bricklayers and concreters) has improved in New South Wales and Victoria. A growing number of home builders in Victoria and New South Wales reported using discounts and incentives in the December quarter to entice sales, with improved labour availability for starting trades in these states having somewhat lessened building times and cost pressures.

Construction activity for new apartments remains low, with firms reporting that many new developments are currently on hold due to the high costs of construction relative to selling prices.

Investment intentions for the year ahead are around average.

Investment intentions for the year ahead drifted down through 2024 and are now around average. Contacts planning to invest more over the year ahead tend to be investing in industrial property, automation and digital transformation projects, which include software, AI, cloud migration, and e-commerce upgrades. Contacts planning to invest less over the year ahead relative to the prior 12 months continue to attribute this to high construction costs and a relatively subdued outlook for demand.

Hiring and hiring intentions have picked up recently.

Firms have reported an increase in hiring in recent months, particularly in the services sector. Firms’ hiring intentions for the year ahead have also picked up recently, but remain below average (Graph D.2). Firms continue to report that staff turnover has declined over the past 12 months and it is easier to fill vacancies than it was a year earlier, though many suggest it is still difficult to find suitable staff.

Firms report that growth in costs remains above growth in selling prices; selling price inflation is not expected to ease much further over the next 12 months.

Wages growth has slowed over the past year and is expected to slow further, but remain above its long-run average over the year ahead.

Growth in non-labour costs has been little changed in recent months and remains above average. The earlier easing in imported cost growth appears to have stopped and some contacts are concerned that imported cost growth may pick up further if the recent depreciation of the Australian dollar is sustained (Graph D.3). Growth in domestic costs such as rents and insurance has eased for some firms. Nevertheless, firms continue to report strong growth in fees from other professional services and subcontractors, as well as energy, software and regulatory costs. Contacts generally tell us that they expect non-labour cost growth to remain elevated over the next 12 months.

While growth in selling prices has eased over the past year, contacts are not expecting growth in their selling prices to ease much further over the next 12 months. Retail, household services, agriculture and manufacturing contacts commonly report that they have not been able to pass through growth in labour and non-labour costs fully into selling prices, with many attributing this to weak demand conditions. In response to reported pressure on margins, contacts have been focusing more on cost management over the past 12 months and have been aiming to improve productivity. Conditions are particularly challenging for many smaller businesses, especially those providing goods and services to households.