10 August, 2010

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The latest D&B National Business Expectations Survey shows

Outlook for the December quarter 2010

• Sales expectations have recovered by seven points, taking the index to 25
• Profits expectations have climbed five points to 17, returning to index to the highest level in five years
• Expectations for growth in inventories remain at the second highest level in seven years after rising one point to an index of eight
• Capital investment expectations are unchanged at an index of 13
• Selling price expectations have fallen a further two points and are now at an index of 15
• Employment expectations remain in positive territory at an index of three despite having fallen two points

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

• Fifty seven percent of executives are being negatively impacted by lagging business to business payment terms, a 21 percent rise since April
• Recent changes in credit market conditions have negatively impacted 52 percent of firms
• Nine percent of firms had less access to credit in the last quarter; while thirteen percent had greater or better access
• Thirty two percent of firms expect to reduce debt in the next three months, six percent intend to increase debt and 59 percent plan to maintain current funding levels
  

Issues expected to influence operations in the December quarter 2010

• Thirty six percent of executives rank interest rates as the primary influence on their business in December quarter
• Twenty five percent of firms expect wages growth to be the primary influence on operations - a fall of three percent in a month
• Sixteen percent of firms believe fuel prices will be their main concern in the quarter ahead - up two percent in one month
• Twelve percent of firms believe access to credit will be the most important business influence in the quarter ahead - a rise of four percentage points since the previous survey
  

Actual for the June quarter 2010

• Capital investment was positive for a fifth consecutive quarter - the index rose to 20, the highest in seven years
• Twenty eight percent of firms increased sales as compared to the June quarter 2009, while 24 percent experienced lower sales
• Fourteen percent of firms increased staff while 10 percent reduced employee numbers
• The profits index fell to 1 - nineteen percent of firms increased profits and eighteen percent recorded lower earnings
• The selling price index rose by nine points to an index of 19 - twenty six percent of firms raised prices and seven percent decreased prices.
  

Australia's executives are expecting a sharp turnaround in sales and profits during the December quarter but their employment and capital investment expectations remain subdued. The latest Dun & Bradstreet Business Expectations Survey reveals that sales and profits expectations - two key indicators of business strength - have risen substantially since the previous quarter, demonstrating that business confidence is improving as year end approaches. Inventories are also expected to increase as firms foresee a need to replenish stocks to keep up with demand however, firms are less optimistic about the need to take on new staff.

The sales index has made a substantial rise, climbing seven points to 25. Forty one percent of firms expect an increase in sales in the December quarter 2010, while 16 percent anticipate a decrease. The most significant increase in expectations has come from the durables manufacturing sector where the sales index rose 17 points to 29.  The retailers' sales index also rose, climbing ten points to an index of 19 however, despite the lead up to Christmas traditionally being a boom time for retailers, this group has the lowest expectations for sales during the December quarter. 

The substantial rise in the overall sales index is flowing through to impact profits expectations. This index rose from 12 for the September quarter to 17, taking the index back to its highest level in five years. Almost three in ten firms (28 percent) expect an increase in profits in the December quarter, while 11 percent anticipate a decrease. Durables manufacturers had the most significant increase in expectations, rising nine points to an index of 16. Non durable manufacturers and retailers have the lowest expectations for an increase in profits, with the index for both groups at 14.

Firms' increased sales expectations are also flowing through to inventories, with this index rising since the previous quarter - the index is currently at the second highest level in six years. Nineteen percent of executives expect to increase inventories, while 11 percent plan to reduce stock levels. A rising contribution of stocks is an important indicator of confidence and the latest rise in this index comes on the back of solid June quarter results where Australian firms recorded their third positive quarter of inventories growth.

Durables manufacturers' confidence is also evident in inventories expectations. A net 17 percent of durables manufacturers expect to increase stock levels in the December quarter, the highest level in seven years. Meanwhile, retailers caution continues to show through in inventories expectations, with this group's index at 4. The only group with a lower index (0) is non durables manufacturers.

                 

Employment expectations are down two points on the September quarter 2010 - nine percent of firms are planning to increase staff levels and six percent expect to reduce employee numbers. The strong rise in the sales expectations of durables manufacturers are flowing through to employment intentions, with this group recording the highest index (10) of any sector. Fourteen percent of durables manufacturers expect to take on new staff in the December quarter, while four percent expect to reduce employee numbers. Meanwhile, the caution displayed by retailers is also apparent in hiring intentions, with this group's employment index at one.

Selling price expectations have fallen by two points to an index of 15. One in five (20 percent) firms expects to raise prices in the December quarter, while five percent expect to lower prices. Despite posing further challenges for sellers, this fall indicates that monetary policy and the withdrawal of the government stimulus are having the intended effect.

Although retailers have demonstrated significant caution in their expectations for sales, profits employment and inventories, this group appears to have changed its strategy regarding selling prices. Previously a significant portion of retailers planned to reduce prices in an effort to turn over their stock however, only two percent now plan to drop prices to stimulate sales. The selling price expectations index for this sector has risen 12 points from the previous quarter to an index of 21.

Capital investment expectations are unchanged at an index of 13. Seventeen percent of executives expect to increase spending in this area, while four percent expect to cut their level of investment. Durables and non-durables manufacturers and retailers have the most significant expectations for capital investment, with the index for all three sectors at 15.

According to Dun & Bradstreet's CEO Christine Christian, there has been a significant turn around in the expectations of Australia's executives since the previous quarter.
 
"Six key indicators of business strength tumbled during the previous quarter, with the sales indicator in particular taking a significant dive," said Ms Christian.

"However, the latest survey shows a significant turn around in confidence and expectations as we head towards the December quarter.

"The number of firms expecting to increase sales and profits is strong, which bodes well for the nation's economic growth in the coming months.  However, Australian firms remain cautious on employment and capital investment.

"These results signal that there is still a way to go before we return to the overall levels of confidence and prosperity that existed prior to the onset of the Global Financial Crisis. But, if executives take a long term approach to business management, which includes a strong focus on investment for the future, Australia should be well positioned to accelerate the pace of growth while many other developed nations continue to face economic stagnation."

Although executive confidence levels for the forthcoming quarter are rising, the latest Business Expectations Survey reveals that 49 percent of firms expect slow growth in demand to be the biggest barrier to growing their business in the year ahead. Sixteen percent of firms perceive skilled labour issues to be the primary barrier to growth and the same percentage expect funding to impact their ability to expand. Meanwhile, 18 percent of firms don't see any major barrier to growth.

Slow paying business customers are impacting an increasing number of firms. Fifty seven percent of executives indicated they are being negatively impacted by slow payers, a rise of 21 percent since April. Yet despite the impact of slow payers on a firm's cash flow, rising sales and profits expectations have 32 percent of executives planning to reduce their level of debt in the next three months. Meanwhile, just six percent of firms expect to increase debt levels and 59 percent plan to maintain current funding arrangements.

Recent changes in credit market conditions have negatively impacted 52 percent of Australian firms. However, the latest survey shows the impact of tighter lending conditions appears to be easing. Only nine percent of Australian executives reported they had less access to credit in the last quarter and 13 percent indicated they had greater or better access. In the surveys from February to May 2010 the proportion with less access to credit was significantly greater than the proportion with greater or better access.

In addition, the number of firms indicating that access to credit will be the most significant influence on their business in the quarter ahead is only 12 percent - this is well down on the 19 and 17 percent recorded in the April and May surveys. Meanwhile, 36 percent of firms rank interest rates as the major influence on their business, 25 percent consider wages growth to be their primary concern and 16 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 a welcome return to higher expectations for growth in sales and profits.

"Last week's Reserve Bank decision to leave cash rates on hold at 4.5 percent will help maintain consumer spending and also encourage business to increase investment in inventories, equipment and buildings," said Dr Ironmonger.

"Although the latest ABS building approvals for June 2010 show a continuing decline in both the number of dwelling units approved and in the total value of buildings approved, the ABS retail trade figures for June show positive growth in turnover."

The D&B index for expected sales is up 7 points to 25, with 41 percent of executives expecting an increase in sales and 16 percent expecting a decrease. The profits index is up five points to 17, with 28 percent of executives expecting profits to rise and 11 percent expecting a fall.
 
Employment expectations are down two points an index of 3, with 9 percent of executives expecting an increase in staff and 6 percent expecting a reduction. Capital investment expectations are unchanged at an index of 13, with 17 percent of executives expecting an increase and 4 percent expecting to cut spending. Inventories expectations are up one point to an index of 8. The selling prices index is down 2 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 July 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.