Executive confidence for the New Financial
Year wanes

Sales expectations have taken the greatest hit

6 July, 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 three points to an index of 13
  • Expectations for growth in inventories have fallen two points to an index of seven but remain at the second highest level in more than five years
  • Selling price expectations have also fallen two points and are now at an index of 17
  • Employment expectations remain in positive territory at an index of five despite having fallen four points
  • Profits expectations are down five points to an index of 12, yet the index is still at the second highest level in five years
  • Sales expectations are down substantially, dropping 15 points to an index of 18

Credit access, market conditions, debt levels and lagging trade payments

  • Twelve percent of firms had less access to credit in the last quarter, while the same number had greater or better access
  • Recent changes in credit market conditions have negatively impacted 47 percent of firms
  • Thirty percent of firms expect to reduce debt in the next three months, seven percent intend to increase debt and 56 percent plan to maintain current funding levels
  • Fifty three percent of executives are being negatively impacted by lagging business to business payment terms, a 17 percent rise since April

Issues expected to influence operations in the September quarter 2010

  • Eight percent of firms believe access to credit will be the most important business influence in the quarter ahead - a figure that is well down on the 19 and 17 percent recorded in the previous two surveys
  • Thirty three percent of executives rank interest rates as the primary influence on their business in September quarter 2010
  • Twenty eight percent of firms expect wages growth to be the primary business influence - a rise of four percent in a month
  • Fourteen percent of executives believe fuel prices will be their main concern in the quarter ahead - up three percent in one month

Actual for the March quarter 2010

  • Capital investment was positive for a fourth consecutive quarter, however it dropped three points to an index of nine
  • Thirty two percent of firms increased sales as compared to the March quarter 2009, while 24 percent experienced lower sales
  • Twelve percent of firms increased staff while 12 percent reduced employee numbers
  • The profits index rose to three - twenty four percent of firms increased profits and twenty one percent recorded lower profit numbers
  • The selling price index fell by five points to an index of 10 - twenty one percent of firms raised prices and eleven percent decreased prices.

Australian executives are indicating that the New Financial Year won't be as buoyant as previously anticipated, with expectations for six key indicators of business strength declining since the previous quarter.

The latest Dun & Bradstreet Business Expectations Survey reveals that the sales, profits, employment, capital investment, inventories and selling prices indices have all fallen since the previous quarter. The fall in the selling prices index indicates that monetary tightening and the end of the Government's stimulus package are having the desired effect on inflation. However, the considerable fall in executive expectations for sales suggests that these factors are also impacting the willingness of firms and households to spend, which could result in lower growth than expected in the year ahead.

The sales index has taken a significant fall, dropping 15 points to 18. Thirty eight percent of firms expect an increase in sales in the September quarter 2010, while 20 percent anticipate a decrease. Despite the significant fall in the sales index, wholesale executives continue to have solid expectations - 45 percent of wholesalers expect to increase sales, while 15 percent anticipate a decrease. However, the substantial decline in the overall sales index is flowing through to impact a range of other indicators including employment, inventories, capital investment and profits.

Employment expectations are down four points on the June quarter 2010 - 15 percent of firms are planning to increase staff levels and 10 percent expect to reduce employee numbers. Despite the fall, all sectors have maintained positive expectations for growth in employment numbers for the third time since the June quarter 2009. The strong sales expectations of wholesalers are flowing through to employment intentions, with this group recording the highest index (11) of any sector. Seventeen percent of wholesalers expect to take on new staff in the September quarter, while six percent expect to reduce employee numbers.

Recent data from the Australian Bureau of Statistics (ABS) reveals that Australia has experienced nine consecutive months of growth in full time employment. The latest expectations of Australian executives indicate this growth will continue in the quarter ahead, however if the employment index continues to fall recent gains could cease or be reversed.  

Inventories expectations are also down on the previous quarter. Nineteen percent of executives expect to increase inventories, while 12 percent plan to reduce stock levels. Wholesalers' confidence is also evident in inventories expectations. A net 16 percent of wholesalers expect to increase stock levels in the September quarter, the highest level in more than six years.

In the March quarter 2010, Australian firms recorded their second positive quarter of inventories growth after seven negative quarters. A rising contribution of stocks is an important indicator of confidence however, if sales expectations continue to fall inventories are also likely to suffer.

The number of executives indicating they will invest in their business in the quarter ahead has fallen. Nineteen percent of firms expect to increase capital investment in the September quarter, while six percent are planning to decrease spending in this area. Wholesalers have the highest intentions to invest in their operations, with the capital investment index at 20. The fall in investment expectations follows a decline in actual capital investment in the March quarter 2010 (the index fell three points from the December quarter).

Profit expectations have fallen but although down five points on the previous quarter, the profits index is at its second highest level in five years. Almost three in ten firms (29 percent) expect their profit levels to increase, while 17 percent expect profits to fall. The number of firms expecting to increase profits is strong. However, it is likely the lower anticipated increase in profits will impact business investment, particularly given the drastic fall in sales expectations. Therefore any short term reduction in profits may impact firms' ability to grow in the long term.

Selling price expectations have dropped two points to an index of 17. One in four (25 percent) firms expects to raise prices in the September quarter, while eight percent expect to lower prices. This fall - which may be positive for buyers but is likely to pose further challenges for sellers - indicates that monetary policy and the withdrawal of the government stimulus are having the intended effect. However, with sales expectations already signalling that executives are concerned about the willingness of firms and consumers to spend in the quarter ahead, any moves to raise prices may further exacerbate the ability of firms to turn over their stock. Retailers appear to be alert to this issue, with 11 percent planning to drop prices in order to stimulate sales. The selling price expectations index for this sector has dropped seven points from the previous quarter to an index of nine.

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Expected Sales, Capital Investment, Profits, Selling Prices, Inventories and Employees Indices

According to Dun & Bradstreet's CEO Christine Christian, executives are indicating that business conditions in the New Financial Year won't be as buoyant as previously expected.  

"Six key indicators of business strength have taken a tumble since the previous quarter, with the sales indicator in particular taking a significant dive," said Ms Christian.

"It is important that executives take steps to address these issues now - it is also important they take a long term approach to business management and growth. The nation's GDP figures for the March quarter were lower than anticipated and if firms pull back their investment now we could find economic growth even more difficult in the years ahead.

"Firms that seek to retain funds in the short term at the expense of investing in their business run the risk of long term stagnation. If this trend becomes widespread within the Australian business community it could have significant consequences for the nation's long term growth prospects."

In addition to showing waning executive confidence for the New Financial Year, the latest Business Expectations Survey reveals that 38 percent of firms expect slow growth in demand to be the biggest barrier to growing their business in the year ahead. An additional 13 percent perceive labour issues to be the primary barrier to growth, while eight percent expect funding to impact their ability to expand.

Slow paying business customers are impacting an increasing number of firms. Fifty three percent of executives indicated they are being negatively impacted by slow payers, a rise of 17 percent since April. Yet despite the impact of slow payers on a firm's cash flow and falling sales and profits expectations, 30 percent of executives plan to reduce their level of debt in the next three months. Meanwhile, just seven percent of firms expect to increase debt levels and 56 percent plan to maintain current funding arrangements.

Recent changes in credit market conditions have negatively impacted 47 percent of Australian firms. However, the latest survey shows the impact of tighter lending conditions appears to be easing. Twelve percent of Australian executives reported they had less access to credit in the last quarter - the same number of firms indicated they had better access. In the previous four surveys the proportion with less access to credit was significantly greater than the proportion with greater or better access. This finding is supported by figures from the Reserve Bank of Australia (RBA) which indicate that the provision of credit to the business sector (in the three months to May) posted its first positive annualised growth since the height of the global financial crisis almost two years ago.

In addition, the number of firms indicating that access to credit will be the most significant influence on their business in the quarter ahead has fallen to eight percent - this is well down on the 19 and 17 percent recorded in the previous two surveys. Meanwhile, 33 percent of firms rank interest rates as the major influence on their business, 28 percent consider wages growth to be their primary concern and 14 percent believe fuel prices will have the most significant impact on operations in the quarter ahead.

According to Dr Duncan Ironmonger, Dun & Bradstreet's economic consultant, the latest survey shows the exuberance accompanying the second, third and fourth quarters of the financial year just ended has given way to more modest expectations for the start of the new financial year.

"Expectations for growth in sales are much weaker, particularly for retailers. The latest Australian Bureau of Statistics retail trade data up to May 2010 reveal a static growth trend of only 0.2 per cent per month in each of the six months since November 2009. Low actual growth in retail sales is obviously affecting expectations," said Dr Ironmonger.

"Similarly the decline over the three months to May 2010 in the value of building approvals - which is largely due to the rapid decline in non-residential approvals as the school building stimulus tapers off - is also impacting on business expectations, particularly for durables manufacturers.

"With softer data coming through the Reserve Bank is likely to leave rates on hold for a number of months."

The D&B index for expected sales is down 15 points to 18, with 38 percent of executives expecting an increase in sales and 20 percent expecting a decrease. The profits index is down five points to 16, with 29 percent of executives expecting profits to rise and 17 percent expecting a fall.  

Employment expectations are down four points an index of 5, with 15 percent of executives expecting an increase in staff and 10 percent expecting a reduction. Capital investment expectations are down three points to an index of 13, with 19 percent of executives expecting an increase and 6 percent expecting to cut spending. Inventories expectations are down two points to an index of 7. The selling prices index is down 2 points to an index of 17, with 25 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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