Profits outlook jumps on Christmas hopes

1 October 2013

Australian businesses are expecting an earnings boost during the Christmas period, with the outlook for year-end profits jumping to their highest levels since the beginning of the year as confidence returns following the election.

After a year of weak and falling expectations, the business outlook for the final quarter of 2013 has improved for the key areas of sales and earnings, with the profits outlook noticeably stronger than in Q4 2012 and Q4 2011.

According to Dun & Bradstreet's National Business Expectations Survey, 28 per cent of businesses expect to increase their profits across the next three months, compared to the seven per cent which forecast a reduction. These responses, taken from the manufacturing; wholesale; retail; services; construction; finance, insurance and real estate; and transportation, communications and utilities sectors; have lifted the survey's profits expectation index to 21.1 points, up from 13.2 points in the previous quarter.

Business expectations traditionally rise during the fourth quarter of the year as companies look for consumers to increase their spending, particularly in the lead-up to Christmas. The seasonal boost has been supported this year by the conclusion of the federal election, with D&B finding that 65 per cent of businesses are more confident about future business conditions following the change in government.

BEX Dec 2013 final - chart 1

"Despite facing tough trading conditions throughout most of the year, businesses are indicating that they see some light at the end of the tunnel," said Danielle Woods, Director of Corporate Affairs at Dun & Bradstreet.

"After reaching a low point in late 2011, we're now beginning to see a genuine upward trend in the number of businesses anticipating that they will increase their earnings.

"Profit expectations are closely linked to optimism, so we often see a lift in the run-up to Christmas, however there's undoubtedly been a boost from last month's change of government, with 65 per cent of businesses saying they are more confident about future businesses conditions," Ms Woods added.

Australian retailers, which provide a barometer for consumer confidence and spending, are upbeat about final quarter activity, with 25 per cent of those surveyed during September expecting to increase their profits. This number rises to 31 per cent among the small business retailers, while seven per cent expect to see a decline in their takings.

Significantly for retailers, the widespread discounting which occurred earlier in the year does not appear to be tied to their current expectations for improved activity, with the majority intending to keep their prices unchanged. Across all sectors surveyed, the selling prices index is steady at 10.2 points, up marginally from 9.4 points in the previous quarter.

During the June quarter, D&B's selling prices index fell to a 24-year low of 2.5 points, with the effect of a high Australian dollar leading many industries to cut their prices to drive sales. Recent movements in the currency, however, appear to have improved competition both domestically and with overseas traders. When asked about the effect of the current level of the Australian dollar, 58 per cent of businesses expected to experience no impact, while 34 per cent expected a positive impact and eight per cent a negative impact.

BEX Dec 2013 final - chart 2

Although recent sales activity has been weak, with the actual sales index falling to -8.3 points in the June quarter - its lowest level in four years, forward expectations have improved. Sales expectations have moved to 7.9 points, up from 4.9 points in the previous quarter as businesses anticipate that the steady, low interest rate levels will stimulate spending across the remainder of the year.

Among the generally positive movements in the latest business outlook, investment and employment remain areas of concern for the wider economy. Despite increasing marginally, the employment and investment indices are in negative territory for Q4 2013, indicating that a greater number of businesses plan to reduce, rather than increase, their levels of hiring and capital spending. Additionally, credit growth remains soft, with D&B finding just eight per cent of businesses intend to seek new finance to help their businesses grow.

"The positive momentum in business expectations that was starting to show up in recent months has lifted appreciably in the latest survey and points to a pick-up in economic activity as 2013 draws to a close," said Stephen Koukoulas, Economic Adviser to Dun & Bradstreet

"Low interest rates and the weaker Australian dollar are now showing up quite directly in activity and the mood of the business sector.

"Dun & Bradstreet's Business Expectations Survey has been a solid leading indicator for the economy in recent years. The improvement in conditions is noteworthy for the RBA as it views the recent house price gains with some trepidation.

"The positive signs for the economy from the survey all but close the door on talk of a further interest rate cut from the RBA," Mr Koukoulas added.

"It would not be surprising that if these positive signals are sustained, the market will be pricing in interest rates rises in the early part of 2014 as the RBA works to normalise monetary policy".

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