Cost pressures, interest rates cool WA business confidence

Business confidence in Western Australia fell back to 2005 levels during the September quarter, cooled by high fuel prices and labour costs, and the August interest rate increase.

The latest CCI-BankWest Survey of Business Expectations - the state's longest-running and most comprehensive business survey - found mounting cost pressures being experienced in WA have seen sentiment checked.

The survey's indices of wage costs and input costs both reached record highs during the quarter, reflecting high demand in both labour and product markets in WA.

Nevertheless, WA businesses generally remain very optimistic about the future, with 85 per cent of the 400 firms participating in the survey believing the WA economy will remain strong or will strengthen over the next 12 months.

Most businesses considered rising input costs to be of greater concern than the recent increase in interest rates. When asked which was having the most negative impact on their business, only ten per cent nominated interest rates, while almost half said labour costs and around one-third chose fuel prices.

The combined impact of cost pressures and interest rates saw a slight deterioration in operating conditions this quarter, with some firms reporting lower sales and profits, and weaker trading conditions. In particular, sentiment among smaller firms appears to be waning, with reports of operating conditions among this segment again the weakest of all respondents.

Smaller businesses were also less active in recruitment this quarter (30 per cent took on more staff) compared to larger firms where nearly half had hired more staff.

Commenting on the results, spokesmen for CCI and BankWest noted that many firms expected interest rates to rise again.

Answering the survey's feature question on interest rates, more than 40 per cent of businesses believed the recent rate rise would adversely affect WA's booming economy. Seventy per cent believe another rate rise is likely this year, and more than half said another rise would be bad for their business.

BankWest chief economist Alan Langford said the feature question results were roughly in line with financial market expectations that the Reserve Bank was likely to take out a bit more insurance against inflation by raising the cash rate again later this year.

"Respondents' concern about rising costs is consistent with the unusually large difference between Perth's inflation rate of 4.7 per cent and the national rate of 4 per cent," Mr Langford said.

"As WA's booming economy surges ahead of most other states - NSW in particular - rising costs are the unhelpful flip side of an economy running up against a clutch of capacity constraints, both in labour and materials."

CCI chief economist John Nicolaou said the strength of the state's economy continued to outweigh the negative impacts associated with higher wage costs, fuel prices and interest rates.

"While the survey shows these pressures are a concern, WA businesses are increasingly fearful that another interest rate rise could impact negatively on the economy, particularly at a national level," he said.