Business spending tumbles

Capital investment and employment cut

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7 May 2013

The deteriorating outlook for the September quarter suggests that despite pockets of optimism, including low interest rates and recovering consumer confidence, a tough trading environment and tight cash flow are restricting business spending.

Following a weak Q2 outlook, Dun & Bradstreet's National Business Expectations Survey shows the capital investment index for Q3 has fallen further, from five to negative three, its lowest point in more than three years. In addition, actual investment for the March quarter dropped to negative six, its lowest level since early 2009 when businesses were taking cover from the global financial crisis.

The manufacturing sector in particular has pulled back investment plans, with no businesses from the industry indicating they will increase capital spending. These findings come at a time when manufacturers continue to be impacted by a high Australian dollar and operational costs, with the Australian Industry Group Australian Performance of Manufacturing Index for March dropping to its lowest point since May 2009.

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The monthly survey of Australian businesses suggests there will be no immediate change to the prevailing policy of financial conservatism from businesses, with employment plans also shelved for the months ahead.

With spending capacity restricted, businesses are showing little intention to start hiring again. The employment expectations index has tipped into negative territory, at -0.5 for the quarter ahead, continuing a slow decline that began in early 2012. With the official unemployment rate moving up to 5.8 per cent in March, the survey's forecast findings suggests there will be no immediate respite for job seekers.

"The steep drop in the capital investment index during the past two quarters is concerning and likely to have an impact on productivity and growth," said Danielle Woods, Dun & Bradstreet's Director of Corporate Affairs.

"This movement takes expectations back to levels seen during the GFC, and the corresponding movement in employment intentions shows that businesses are continuing to bunker down and limit expenses. This will naturally have a knock-on effect for spending activity in the rest of the economy.

"With the RBA's figures on business credit showing weak growth, and our survey revealing less than four per cent of businesses intend to access new credit to grow their business, it's unlikely we'll see a turnaround on business expenditure in the near-term," she added.

The D&B survey, which began in 1988, covers businesses from the manufacturing; wholesale; retail; construction; transport; communications and utilities; finance, insurance and real estate; and services sectors. Its findings on Q3 expectations reveal some signs of optimism as a result of businesses keeping an eye on their expenses.

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The outlook for profits has picked up, with the index recovering to 19 after it fell sharply to 14 in the previous quarter, and expectations for sales have improved marginally from 13.5 to 14.4. Forty-seven per cent of businesses in the transport, communications and utilities sector expect increased profits next quarter, while three per cent expect a decline in earnings.

After a disappointing end to 2012, retailers are also reporting higher sales and profits expectations for Q3 this year. These findings follow from ABS statistics showing improving levels of retail trade during the first two months of 2013.

Selling price expectations across industries appears to have stabilised, with businesses readjusting to a persistently high Australian dollar. The index has remained flat for the third consecutive quarter, although it has settled at a historically low index of three, 25 points below its 10-year average. Businesses from the finance, real estate and insurance industries have bucked the industry trend, with increased prices expected in the coming months.

"This latest research confirms a marked cooling in economic activity with a further fall in expected capital expenditure. At the same time, the business sector has scaled back its plans for employment which suggests there are more upside risks to the unemployment rate in the months ahead, " said Stephen Koukoulas, Economics Advisor to Dun & Bradstreet.

"This news from the business sector adds further weight to the already overwhelming case for an interest rate cut from the Reserve Bank when it meets today. The recent official data on credit growth showed a slowing in activity, and this weakness has continued into the June quarter with the D&B survey also showing a further decline in credit demand."

"The fall in expected selling prices witnessed in earlier D&B surveys has shown up in the recent official inflation data which also came in well below expectations," Mr Koukoulas added.

When asked about the outcome of this year's Federal Election, 38 per cent of businesses viewed a Coalition Party victory as more favourable for their business's operations, while seven per cent indicated a Labour Party election win would be more beneficial.

 

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