Inflationary pressures ease as interest rates bite

Employment and selling price expectations growth stall

11 May, 2010

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The latest D&B National Business Expectations Survey shows

Outlook for the September quarter 2010

  • Selling price expectations are down four points from the June quarter index of nineteen
  • Employment expectations remain in positive territory at an index of eight, down a point on the June quarter
  • Capital investment expectations are unchanged (at an index of 16) and remain at the highest level in almost seven years
  • Profits expectations are also unchanged at an index of 17, the highest level in five years
  • Sales expectations remain high but have fallen five points to an index of 28
  • Expectations for growth in inventories are down one point but remain at the second highest level in more than five years

Credit access, debt levels and lagging trade payments

  • Twenty one percent of firms had less access to credit in the last quarter while 15 percent had much greater or moderately better access
  • Twenty seven percent of firms expect to reduce debt in the next three months, 10 percent intend to increase debt and 54 percent plan to maintain current funding levels
  • Thirty six percent of executives are being negatively impacted by lagging business to business payment terms, a seven percent fall since March

Issues expected to influence operations in September quarter 2010

  • Thirty three percent of executives rank interest rates as the primary influence on their business in September quarter 2010. Meanwhile, 23 percent expect wages growth to be the primary influence - a fall of 16 percent since March. Seventeen percent believe fuelprices will be their main concern in the quarter ahead - a rise of six percent since February.
  • Access to credit- a new issue added to the list in April - was seen by 17 per cent of respondents as the most important influence in the quarter ahead

Actual for March quarter 2010

  • Capital investment was positive for a fourth consecutive quarter, dropping one point to an index of 11 - the second highest in more than six years
  • Twenty nine percent of firms increased sales as compared to the March quarter 2009, while 25 percent experienced lower sales 
  • Thirteen percent of businesses increased staff and ten percent reduced employee numbers
  • The profits index remains at an index of zero - 24 percent of firms increased profits and twenty four percent recorded lower profit numbers
  • The selling price index fell by five points to an index of ten - eighteen percent of firms raised selling prices and eight percent decreased prices

There are signs monetary tightening by the Reserve Bank and the end of the Government's stimulus package are having the desired effect on inflation with Australian executives reporting lower expectations across a range of indices for the start of the new financial year.

The latest Dun & Bradstreet Business Expectations Survey, which examines expectations for the September quarter, reveals executives are expecting slower growth in sales, employment, inventories and selling prices compared to the June quarter. In positive news the decline in selling price expectations is a sign that there may be some easing of inflationary pressures as firms respond to the impact of rising interest rates.

The expected sales index fell five points to 28 returning to the level of the March quarter. However, the sales index remains high and is up 76 points on the June quarter 2009 trough. Thirty nine percent of firms expect an increase in sales and 11 percent anticipate a decrease in the September quarter 2010. Wholesale executives have the highest sales expectations (an index of 39) with 46 percent expecting an increase and seven percent a decrease.

The decline in sales expectations is also having an impact on employment expectations. Employment expectations are down one point on the June quarter 2010 but remain 34 points up on the June quarter 2009, the lowest employment expectations recorded since the survey began in 1988. Fifteen percent of firms are planning to increase staff levels and seven percent expect to reduce employee numbers in the quarter ahead.

Profit expectations remain strong. The profits index is now at its highest level in five years, unchanged from the previous quarter and 74 points higher than the trough in of the June quarter 2009. More than a quarter of respondents (27 percent) expect their profits levels to increase in the September quarter. The retail sector regained its position as the sector with the highest profit expectations (an index of 23), with 31 percent of executives expecting an increase and eight percent a decrease.

Expectations for capital investment remain on par with the March quarter signalling executives are still keen to invest in their businesses if they can access credit. However, one in five executives are reporting they had less access to credit than in the previous quarter. Nineteen percent of firms expect to increase capital investment, while just three percent are planning to decrease spending in this area. Non-durables manufacturers have the highest of capital investment expectations (an index of 27) and durables manufacturers the lowest (an index of four). Business investment is seen as a critical factor in Australia's future economic success so maintaining the turn around in capital investment since the lows of mid 2009 is a positive sign that executives believe the recovery will be sustained.

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 18, with 22 percent expecting to increase employment and four percent expecting to decrease staff numbers.

Selling price expectations have fallen by four points to an index of 15. One in five (20 percent) firms expects to raise prices in the September quarter, while five percent expect to lower prices. Concerns over the impact of rising selling prices on underlying inflation were seen as a key factor for triggering the latest interest rate by the Reserve Bank of Australia (RBA).

However in response to the slight decline in sales expectations inventories expectations are also down slightly on the previous quarter. This is coming off a high base with expectations for growth in inventories for the latest four quarters the highest in more than four years. Seventeen percent of executives expect to increase inventories in September quarter, while nine percent plan to reduce stock levels. The expectations of non-durables manufacturers have reached the highest level in eight years with a net 19 percent of firms expecting to increase stock levels in the September quarter. Actual capital investment in the March quarter 2010 is down one point on the December quarter which was the highest level in more than six years. There have now been four positive quarters of capital investment after five negative quarters from March 2008 to March 2009. Fourteen percent of firms invested more in capital and three percent invested less than in the March quarter 2009. All sectors had actual capital investment growth in positive territory in both the December and March quarters.

The preliminary index of the net proportion of firms with actual increases in inventory levels is two for March quarter 2010, down one point from the December quarter. However this is only the second positive quarter of inventory levels after seven negative quarters. The increased contribution of stocks is an important indicator of business confidence and represents a significant improvement since the low (actual index) of -11 for the March quarter 2010.

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

According to Dun & Bradstreet's CEO Christine Christian, the impact of rising interest rates and a reduction in government stimulus is having the desired effect on inflationary pressures.

"The reduction in selling price expectations is a positive sign to ease government concerns about growing inflation," said Ms Christian. "Given that the RBA has listed rising selling prices as a key trigger for interest rate rises, this may reduce the need for further immediate action by the central bank."

Ms Christian also believes that despite a slight fall across a number of indices Australian executives have generally maintained the same positive outlook in 2010.

"Despite a slight fall in confidence levels in key indices such as sales and employment the overall outlook for Australian executives remains positive and substantially better than at the same point in time in 2009. The question now is how long will this positive outlook continue?"

Business-to-business payment days are still having a negative impact on one in three (36 percent) firms, a fall of seven percent since March. Dun & Bradstreet's Trade Payment Analysis reveals that a deterioration in payment terms in the March 2010 quarter has taken terms up to 54.1 days. This has led to concern that the payment behaviours of Australian firms could derail the economic recovery, with terms deteriorating for the second consecutive quarter despite improving business conditions.

Thirty three percent of firms rank interest rates as the major influence on their business and 23 percent consider wages growth to be their primary concern. Only 17 percent of executives believe fuel prices will be the primary influence on operations in the quarter ahead. Access to credit also scored a vote of 17 percent as the most important influencing factor on their business in the quarter ahead.

With the continued improvement in profits expectations, 27 percent of executives plan to reduce their current business debt levels in the next three months, 16 percent reduce significantly and 11 per cent moderately. Only 10 percent expect to increase their business debt and 54 percent plan to maintain current debt levels.

According to Dr Duncan Ironmonger, Dun & Bradstreet's economic consultant, the latest D&B survey shows Australian business executives will start the next financial year with strong expectations for their firms business performance in the September quarter. Investment expectations continue at their highest levels in almost seven years.

"Although expectations for growth in profits are at the highest in five years, expectations for growth in sales have declined a fraction. Consequently, executives have made small downwards adjustments to their intentions to make increases in staff numbers, selling prices and inventories," said Dr Ironmonger.

"After the rises in official interest rates in six of the last eight months the Reserve Bank is likely to leave rates unchanged for the next month or two. This should enable business and household borrowing to stabilise with interest rates at about average for the decade."

The D&B index for expected sales is down five points to 28, with 39 percent of executives expecting an increase in sales and 11 percent expecting a decrease. The profits index is unchanged at 17, with 27 percent of executives expecting profits to rise and 10 percent expecting a fall.

Employment expectations are down one point an index of 8, with 15 percent of executives expecting an increase in staff and 7 percent expecting a reduction. Capital investment expectations are unchanged at an index of 16, with 19 percent of executives expecting an increase and 3 percent expecting to cut spending. Inventories expectations are down one point to an index of 8. The selling prices index is down 4 points to an index of 15, with 20 percent of firms expecting to raise prices and 5 percent expecting to decrease them.

About the survey
D&B Australasia conducted the latest Business Expectations Survey in April 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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