Budget talk fails to dampen business outlook

Third quarter sales outlook reaches 10-year high

6 May 2014

The near-term business outlook in Australia has improved despite expectations of across-the-board spending cuts in this month's Federal Budget, with companies forecasting increased sales, employment and investment activity during the third quarter of this year.

According to Dun & Bradstreet's Business Expectations Survey, the next financial year will start with a continuation of a more positive outlook from the business sector, with the sales index lifting for a fourth consecutive quarter. Forty-four per cent of businesses are anticipating increased trade while nine per cent expect reduced activity, taking the index for Q3 2014 to a new 10-year high of 34.8 points, up from 4.9 points a year earlier, and 33.6 points last quarter.

Manufacturers are the most upbeat, shaking off last year's run of soft expectations, concerns about the level of the Australian dollar and high-profile closures in the industry. With 58 per cent anticipating increased activity next quarter, the sector's sales expectations index has risen to 50.8 points, up from 41.8 points a quarter earlier and 1.3 points in Q3 2013.

BEX Q3 2014 - prelim - chart 1

Across industries confidence is resilient, with D&B finding that 64 per cent of businesses expect stronger growth this year, compared to 2013.

With healthy levels of optimism, business spending plans are also trending upwards. Twenty-one per cent indicate they will add staff in the quarter ahead, while nine per cent will reduce their workforce. These responses have moved the employment index to 12.2 points, its highest level since the global financial crisis.

Additionally, D&B's capital investment index has continued its positive trend, increasing marginally to 11.5 points for the third quarter, up from -1.5 points a year earlier.

"Following a generally positive start to 2014, it's encouraging to see that the recent optimism and business expectations about the year ahead are being maintained through to the third quarter," said Gareth Jones, CEO of Dun & Bradstreet-Australia and New Zealand.

"All of the measures in D&B's Business Expectations Survey are up on last year's readings, and importantly, employment and investment expectations - which fell into negative territory late last year - have now improved for a fourth consecutive quarter."

"The further lift in the employment outlook bodes well for the rest of the economy and provides support to opinions that the unemployment rate may have peaked following last month's surprise fall to 5.8 per cent," Mr Jones added.

After increasing steadily through the final months of last year and into Q1 2014, the profits outlook from businesses remains steady. D&B's latest survey has found that 35 per cent of businesses expect greater profits in the next quarter, while 15 per cent anticipate reduced earnings. This response has seen the profits index ease to 20.2 points compared to 20.7 points in the previous quarter; although the reading is up from 13.2 points at the same time last year.

Reported earnings for the previous quarter, however, have decreased sharply and into negative territory for the first time since 2011, suggesting that the recent optimism is not translating into actual results. The actual profits index for Q1 2014 is -6.7 points, down from 3.9 points a quarter earlier and 8.5 points at the same time last year.

Following lower than expected inflation data released last month, D&B has found that the number of businesses intending to raise their selling prices has also fallen from the previous quarter. While 27 per cent of businesses intend to increase their prices in the months ahead, compared to seven per cent that will discount, the selling prices index has eased from 24.1 points to 20.7 points.

BEX Q3 2014 - prelim - chart 2

"The clear lift in economic activity continues to unfold," said Stephen Koukoulas, Economic Advisor to Dun & Bradstreet.

"Expected sales have risen strongly since the middle of 2013 and are almost three times over the 10-year average, suggesting that economic growth is poised to rise to an above trend pace when the official data for the first half of 2014 is released," he said.

"Encouragingly, the recent gains in expected employment have consolidated at a more favourable level, and the capital investment outlook has maintained its improvement.

"The only slightly disappointing note is a marginal pull-back in expected profits, but it should be noted this tick lower is from a high base," Mr Koukoulas noted.

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