Sharp turnaround in business expectations

                                                                                                                                     11 August 2009

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The latest D&B National Business Expectations Survey shows

Outlook for the December quarter 2009

  • Sales and profits expectations have recorded the greatest one-quarter rises since the survey began - 44 percent of respondents expect an increase in sales and 31 percent expect an increase in profits
  • The employment indicator has also risen sharply with 15 percent of businesses expecting to increase staff in the December quarter and 8 percent anticipating a decrease
  • Capital investment expectations are at the highest level in six years - 17 percent of firms expect an increase in this area and five percent expect a decrease
  • Expectations for growth in inventories has reached the highest level in five years - 18 percent of firms plan to increase stock while 10 percent expect to decrease inventories
  • Selling price expectations have fallen to the lowest level in more than four years - 35 percent of firms expect to increase prices and 8 percent intend to cut prices

Impacts of credit market conditions and lagging trade payment days

  • The negative impact of credit market conditions on firms has declined to the lowest level in seven months - 43 per cent reported a negative impact while 16 percent experienced a positive impact
  • 49 percent of executives are being negatively impacted by  lagging business to business payment terms

Issues expected to influence operations in the December quarter 2009

  • Thirty six percent of executives rank wages growth as the primary influence on their business in December quarter 2009, while 30 percent expect interest rates to be their main concern and 20 percent believe fuel prices will have the most significant influence

Actual for June quarter 2009

  • Forty percent of firms experienced lower sales as compared to the June quarter 2008, while 26 percent increased sales
  • Thirty eight percent of firms recorded lower profits while 18 percent increased profits
  • Thirty one percent of firms raised selling prices, while 12 percent decreased prices
  • Twenty one percent of firms had fewer staff and eleven percent had more staff in the June quarter of 2009
  • Seventeen percent of firms spent more on capital investment (the highest in more than five years), while 7 percent decreased expenditure in this area.

The expectations of Australian firms have improved substantially since the previous quarter, with expectations for sales, profits, employment, inventories and capital investment all back in positive territory, and some indices making the greatest one-quarter change since the survey began in 1988. However despite this improvement in sentiment, trading conditions are expected to remain challenging due to a combination of cash flow constraints, a high debt interest burden and tightened criteria for new lending.

These findings are from the latest D&B Business Expectations Survey, which shows that the sales index experienced the largest one-quarter rise in the history of the survey, up 46 percentage points. Forty four percent of firms expect an increase in sales in the December 2009 quarter, while 22 percent expect a decrease. The sales expectations of those in the wholesale sector have improved more significantly than others, with the index increasing by 56 points as compared to the September quarter. The retail sector also rose significantly with an increase of 48 percentage points.

The expected increase in sales is also reflected in firm's intentions to increase inventories. Eighteen per cent of executives expect an increase in inventories and 10 per cent a decrease. Expectations in the retail sector have risen to the highest level in five years, with 25 percent of businesses expecting to increase stock levels. However a significant increase in inventories could leave firms (particularly retail firms) with unsold stock. Sales are expected to come under pressure in the months ahead as the impact of the government stimulus package on household spending wanes. Signs of this slowdown are already beginning to show through, with recently released figures revealing a drop of 1.4 percent in retail sales for the month of June.

Capital investment expectations also entered positive territory, with 17 percent of firms expecting to increase investment and five percent planning to decrease spending in this area. Retail executives have the highest expectations of increasing capital investment at sixteen percentage points; however this spending may come under pressure if the declining sales experienced in June continue.  

Expectations for employment have made a large upward movement, with 15 percent of firms expecting to increase staff and eight percent expecting to reduce employee numbers in the quarter ahead. Other recent employment figures support this outlook - a minor improvement in the rate of decline for job advertisements occurred during July and Australian Bureau of Statistics (ABS) figures revealed that confirmed July unemployment figures remained steady at of 5.8 percent in July. However employment expectations may be distorted as there has been a large move towards part time employment since the credit crisis hit, with ABS figures showing that 190 700 part time positions had been created in the year to July whilst at the same time the economy shed 189 000 full time roles.

Expectations for selling prices have dropped by 48 percent since the March quarter 2009. One in three (35 percent) firms expects to raise prices in the December quarter, while eight percent expect to lower prices. Retail executives had the most significant drop in expectations for increased prices, falling 36 percentage points. This follows June quarter results which revealed that a significant number of retail firms reduced prices. This trend has become apparent in the retail industry in recent quarters as firms have resorted to discounting in order to turn over stock. As more Australians are forced into part time work the consequent reduction in disposable income is likely to have further implications for the sector.

The profits index had its most significant one-quarter rise since the survey began in 1988. Thirty one percent of executives now anticipate that profits will increase in the December quarter, while 20 percent expect a decrease. This is the first time in six quarters that the profits outlook has been positive. The wholesale sector has the highest profit expectations, with eighteen percent of executives in this sector expecting a rise in profits. However achieving profits expectations may be difficult if firms increase their outlays on inventories and capital investment while sales continue to fall.

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D&B Expected Sales, Profits, Employment and Capital Investment Indexes

According to Dun & Bradstreet's CEO Christine Christian, the significant uplift in executive expectations evident in the latest survey indicates that many Australian firms believe we are on the road to recovery. However she warns against executives relaxing their tight focus on the fundamentals too early.

"The improvement in key indices such as employment and sales expectations is a sign that the economic stimulus has been successful in encouraging household spending," said Ms Christian.

"However the road to recovery will continue to be challenging and the last thing Australian firms need is for executives to see recent signs of promise as an indicator that they can relax their focus on the fundamentals of cash flow and risk management.  

"Further challenges do lie ahead. D&B expects the trading environment to remain difficult as a combination of cash flow constraints, a high debt interest burden and tightened criteria for new lending will perpetuate the cautious operating environment.

"As Australia works towards putting itself back on the path to sustained growth, executives must tightly manage their operations to ensure a speedier return to prosperity."

Despite having their lowest impact in seven months, credit market conditions continue to have a negative impact on firms. Forty three percent of firms indicated that credit market conditions are detrimentally impacting their business (a decrease of 10 percent in one month), while 16 percent report a positive impact (up 9 percent in a month).

Rising business-to-business payment days have had a negative impact on five in ten (49 percent) firms, an increase of 18 percent in just one month. Dun & Bradstreet's own trade payments data indicates that Australian businesses averaged 54.8 days to settle accounts in the June quarter, adding pressure to business cash flow which is already being impacted by the slowing economy. In addition, recent D&B research indicates that payment difficulties will continue; since 1 April 2009 more than 25,000 organisations have been rated a higher risk of paying their trade accounts in a severely delinquent manner.

Despite the improvement in business sentiment, some firms see a need to improve their cash position by paying down their debt. Thirty percent of firms plan to reduce their debt levels (moderately or significantly). Conversely, some firms are confident in taking on more debt, with 13 percent of firms having this intent. These are likely to be firms that have effectively managed the fundamentals during the crisis and are in a strong position to take advantage of opportunities that have arisen.

Reflecting the change in industrial relations laws in July, there has also been a rise in executive concerns about possible growth in wages. Thirty six percent of executives expect wages growth to be the primary influence on operations in the quarter ahead, a rise of 15 per cent since June and the highest level since April 2007. The influence of interest rates on Australian businesses has continued to fall at a time when the RBA cash rate remains at a 49 year low. Thirty percent of firms rank interest rates as a major influence on their business, a 28 percent fall since February 2009.  Meanwhile, 20 percent of firms consider petrol prices to be their primary business influence, a six percent rise since February 2009.

This upward movement reflects the recent rise in petrol prices and it has resulted in a 20 percent increase in the past month in the number of executives reporting negative affects on their business from fuel costs. Twenty seven percent of firms now report a negative impact.

According to Dr Duncan Ironmonger, Dun & Bradstreet's economic consultant, despite month to month variations in retail sales turnover, the annual rate of growth of retail sales in volume terms over the first half of 2009 has been five percent. This is far ahead of the negative growth in mid-2008 and is the best growth in retail sales volume since 2007.

"Although the impact of the Federal fiscal stimulus packages will abate, the Reserve Bank seems likely to maintain a policy of low interest rates over the second half of 2009. This should help maintain both housing investment and consumer spending in the months ahead," said Dr Ironmonger.

"The D&B survey indicates that after five quarters of declining expectations, sales and profits expectations are now back in positive territory. A rise of over 40 points in these indexes for the December quarter is the greatest recorded in the history of the survey."

The D&B index for expected sales is up 46 points to 22, with 44 percent of executives expecting an increase in sales and 22 percent expecting a decrease. The profits index is up 44 points to 11, with 31 percent of executives expecting profits to rise and 20 percent expecting a fall.  

Employment expectations are up 29 points an index of 7, with 15 percent of executives expecting an increase in staff and 8 percent expecting a reduction. Capital investment expectations are up 20 points to an index of 12, with 17 percent of executives expecting an increase and 5 percent expecting to cut spending. Inventories expectations are up 26 points to an index of 8. The selling prices index is down 25 points to an index of 27, with 35 percent of firms expecting to raise prices and 8 percent expecting to decrease them.

About the Survey

D&B Australasia conducts latest Business Expectations Surveys every month. Each quarter over 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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