Access to credit critical to future growth

Capital investment and inventroy expectations fall

8 June, 2010

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The latest D&B National Business Expectations Survey shows

Outlook for the September quarter 2010

  • Capital investment expectations are down two points to an index of 14
  • Expectations for growth in inventories are down three points but remain at the second highest level in more than five years (an index of six)
  • Selling price expectations are down four points from the June quarter index of nineteen
  • Employment expectations remain in positive territory at an index of five but are down four points on the June quarter
  • Profits expectations are down one point to an index of 16, the second highest level in five years
  • Sales expectations are still high but have eased 10 points to an index of 23

Credit access, debt levels and lagging trade payments

  • Twenty one percent of firms had less access to credit in the last quarter, while nine percent had much greater or moderately better access
  • Twenty five percent of firms expect to reduce debt in the next three months, 16 percent intend to increase debt and 55 percent plan to maintain current funding levels
  • Forty six percent of executives are being negatively impacted by lagging business to business payment terms, a ten percent rise since April

Issues expected to influence operations in the September quarter 2010

  • Nineteen percent of executives believe access to credit - a new issue added to the survey in April - will be the most important business influence in the quarter ahead
  • Thirty five percent of executives rank interest rates as the primary influence on their business in September quarter 2010
  • Twenty four percent of firms expect wages growth to be the primary influence - a fall of 15 percent since March - while 11 percent believe fuel prices will be their main concern in the quarter ahead

Actual for the March quarter 2010

  • Capital investment was positive for a fourth consecutive quarter, however it dropped three points to an index of 9
  • Thirty one percent of firms increased sales as compared to the March quarter 2009, while 28 percent experienced lower sales
  • Twelve percent of businesses increased staff and 13 percent reduced employee numbers
  • The profits index fell to an index of -2 - twenty four percent of firms increased profits and twenty six percent recorded lower profit numbers
  • The selling price index fell by seven points to an index of eight - twenty percent of firms raised selling prices and twelve percent decreased prices.

Access to business credit is critical to continuing Australia's resurgence, with signs the impact of tighter lending conditions are being felt by many firms. Twenty percent of Australian executives reported they had less access to credit in the last quarter and one in five have indicated their ability to access credit will be the most important influence on their business in the quarter ahead.

The latest Dun & Bradstreet Business Expectations Survey, which examines expectations for the September quarter, reveals that executives are expecting slower growth in inventories and capital investment compared to the June quarter, results which are in line with Dun & Bradstreet and Reserve Bank of Australia (RBA) figures showing many executives had less access to credit in the last quarter. RBA figures show that business credit declined by seven percent over the year to April and that business borrowing fell 0.4 percent in April. An aversion to debt among some businesses and difficulties securing funding for others may act as a handbrake on future growth. The survey also shows that employment, profit, sales and selling price expectations has fallen since the June quarter, but all remain positive and well above GFC levels.

Expectations for growth in capital investment are down on the March quarter, however they remain positive signalling that executives are still keen to invest in their businesses if they can access credit. Eighteen percent of firms expect to increase capital investment, while just four percent are planning to decrease spending in this area. Non-durables manufacturers and wholesalers have the highest capital investment expectations (both an index of 22).

Actual capital investment hit a six year high in the December quarter however, it has since fallen back three points. There have now been four positive quarters of capital investment growth after five negative quarters (from March 2008 to March 2009). Fifteen percent of firms invested more in capital and six percent invested less than in the March quarter 2009.

Inventories expectations are also down on the previous quarter however the index comes off a high base. Expectations for growth in inventories have been at their highest level in more than five years for the last four quarters. Sixteen percent of executives expect to increase inventories in the September quarter, while ten percent plan to reduce stock levels. The expectations of wholesalers have reached the highest level in almost six years with a net 11 percent of firms expecting to increase stock levels in the September quarter.

Firms with actual increases in inventory levels reached an index of four for March quarter 2010, up one point from the December quarter. However this is only the second positive quarter of inventory growth after seven negative quarters. The increased contribution of stocks is an important indicator of business confidence and represents a major improvement since the low (actual index) of -11 in the March quarter 2010.

The expected sales index fell ten points to 23 but remains well above the trough levels that prevailed from the September quarter 2008 to the September quarter 2009. Thirty nine percent of firms expect an increase in sales and 16 percent anticipate a decrease in the September quarter 2010. Wholesale executives have the highest sales expectations (an index of 32), with 44 percent expecting an increase and 12 percent a decrease.

The decline in sales expectations is also having an impact on the employment plans of Australian executives'. Employment expectations are down four points on the June quarter 2010 but remain 31 points up on the June quarter 2009 when employment expectations fell to the lowest level recorded since the survey began in 1988. Fourteen percent of firms are planning to increase staff levels and nine percent expect to reduce employee numbers in the quarter ahead.

All sectors continue to have positive expectations for growth in employment numbers, the third time this has occurred since the June quarter 2008. Wholesalers have the highest index at net 10, with 16 percent expecting to increase employment and six percent expecting to decrease staff numbers.

According to Dun & Bradstreet's CEO Christine Christian, recent interest rate rises and tight lending conditions are being felt by a number of Australian businesses.

"The reduction in capital investment and inventories expectations is a sign that Australian executives believe credit will continue to be tight in the coming quarter," said Ms Christian.

"Given one in five businesses consider access to credit to be the most important influence on their business in the quarter ahead executives will be watching the RBA's interest rate plans very closely in coming months.

"However despite falls across a number of indices Australian executives have generally improved their outlook in 2010. Expectations have improved overall since the September quarter 2009. The critical factor now is how significantly tightening financial conditions will impact the growth plans of Australian firms and what executives will do to address these


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D&B Expected Sales, Capital Investment, Selling Prices and Inventories Indices

Selling price expectations have fallen by four points to an index of 15. One in five (23 percent) firms expect to raise prices in the September quarter, while eight percent expect to lower prices. In a move which may be intended to stimulate sales, the interim selling price expectations for the retail industry dropped seven points from the previous quarter to an index of nine.

Profit expectations, also fell slightly but remain strong. Although down one point on the previous quarter, the profits index is at its second highest level in five years, and 73 points higher than the trough in of the June quarter 2009. Almost a third of respondents (30 percent) expect their profits levels to increase in the September quarter.

Despite the slight fall in profits expectations, 25 percent of executives plan to reduce their current business debt levels in the next three months, 12 percent indicated they will reduce debt significantly and 13 per cent moderately. Only 16 percent expect to increase their business debt levels.

Business-to-business payment days are still having a negative impact on almost one in two (46 percent) firms, a rise of ten percent since April. Dun & Bradstreet's Trade Payment Analysis reveals that a deterioration in payment terms in the March 2010 quarter has taken terms to 54.1 days.   

Thirty five percent of firms rank interest rates as the major influence on their business and 24 percent consider wages growth to be their primary concern. Only 11 percent of executives believe fuel prices will be the primary influence on operations in the quarter ahead.

According to Dr Duncan Ironmonger, Dun & Bradstreet's economic consultant,the latest survey shows Australian business executives will start the new financial year with somewhat weaker expectations than for the end of the current financial year. Expectations for the September quarter have been marked down, particularly for growth in sales and employment.

"The latest national accounts from the ABS show that growth in the economy for the March quarter was mainly driven by public fixed capital expenditure and household consumption expenditure," said Dr Ironmonger.

"Private investment in fixed capital has not yet risen sufficiently to add to growth and the government capital expenditure stimulus will be winding down over the next few quarters. After raising the cash rate in March, April and May, the Reserve Bank decided at its June meeting that the setting of monetary policy was appropriate for 'the near term' and left rates unchanged. Hopefully businesses can expect the near term to last until the end of 2010."

The D&B index for expected sales is down 10 points to 23, with 39 percent of executives expecting an increase in sales and 16 percent expecting a decrease. The profits index is down one point to 16, with 30 percent of executives expecting profits to rise and 14 percent expecting a fall.  

Employment expectations are down four points an index of 5, with 14 percent of executives expecting an increase in staff and 9 percent expecting a reduction. Capital investment expectations are down two points to an index of 14, with 18 percent of executives expecting an increase and 4 percent expecting to cut spending. Inventories expectations are down three points to an index of 6. The selling prices index is down 4 points to an index of 15, with 23 percent of firms expecting to raise prices and 8 percent expecting to decrease them.

About the survey

D&B Australasia conducted the latest Business Expectations Survey in May 2010. Each quarter 1,200 business owners and senior executives representing major industry sectors across Australia are asked if they expect increases, decreases or no changes in their upcoming quarterly Sales, Profits, Employment, Capital Investment, Inventories and Selling Prices. Since its introduction in Australia in 1988, the Survey has proven to be a highly reliable measure of economic performance.

NOTE: The index figures used in the Survey represent the net percentage of Survey respondents expecting higher sales, profits, etc., compared with the same quarter of the previous year. The indices are calculated by subtracting the percentage of respondents expecting decreases from the percentage expecting increases.

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