Australian Business Leaders Predict Tough Times for Rest of 2008

Australia’s business executives are expecting a sombre lead into Christmas as movements in the Aussie dollar, high fuel prices, continued inflationary pressures and declining consumer spending hurt their sales and profits prospects.

The latest Dun & Bradstreet (D&B) Business Expectations Survey reveals that the dramatic 20% fall in the value of the Australian dollar since July has had a significant impact on firms, with 49% indicating a negative impact on operations (a 37% increase since July). Wholesale businesses reported the largest swing from a net 31% positive in July to 40% negative in the current survey.

Fuel prices are also hurting Australian businesses with nine in ten (93%) indicating that recent price movements have had a detrimental impact on operations – a 32% increase since March.

The December quarter is expected to bring a steep decline in sales, profits, employment growth and capital investment, with all of these indexes in negative territory for the second consecutive quarter. However selling price expectations continue to rise and have hit the highest level in 20 years (an index of 62) following an increase of 11%. Sixty six per cent of executives expect to raise selling prices in the coming quarter, a clear sign that inflationary pressure will continue at least in the short-term.

The slowdown in consumer spending noticed by 29% of firms and the poor results experienced in the first two quarters of 2008 are reflected in declining sales and profits expectations for the December quarter. The sales index has declined by 42 points since the December quarter of 2007, while the profits index has declined by 43 points over the same period. Forty four per cent of firms now anticipate declining sales while 49% have the same expectation for profits.

The employment index has dropped to its lowest level in 17 years, with 23% of executives expecting to have fewer staff in the quarter ahead than they did a year ago.

Capital investment expectations are up one point to minus six. Eleven per cent of firms expect a decrease in capital investment.

According to Christine Christian, Dun & Bradstreet’s CEO, despite the negative outlook for the December quarter Australia is holding up well compared to other countries amidst the current financial turmoil.

“Australian businesses are undoubtedly facing some very real challenges,” said Ms Christian. “Profit margins are being eroded by a slowing economy and escalating funding and goods costs, while the decline in the Aussie dollar is forcing businesses to pay more for their imports.

“These factors have hit business confidence hard, causing expectations for the December quarter to drop to levels not seen since the 1990s. However Australia’s outlook continues to be stable at a time when the economic conditions in many countries are deteriorating very rapidly. Another move by the Reserve Bank to cut interest rates should be received positively by business given its likely positive flow on effects on spending and investment.”

Sixty nine per cent of firms indicate that a tightening credit market will have a negative impact on operations.

Interest rates and petrol prices continue to lead executive concerns, with four in ten (42%) indicating that interest rates will be their primary issue in the quarter ahead (up 4% since the previous survey). More than half (55%) of retail executives rank interest rates are their primary concern in the December quarter.

Recent falls in petrol prices have led to a slight easing in executive concerns. Thirty four percent of executives now anticipate that fuel prices will have the most significant influence on their operations in the quarter ahead. Meanwhile wages growth concerns have increased slightly – 22% of firms now rate wages growth as their primary concern.

According to Dr Duncan Ironmonger, Dun & Bradstreet’s economic consultant, Australia’s strong and well regulated financial system will ensure that financial stability is maintained despite the turmoil hitting world financial markets. “Australia will not experience the drastic decline in house prices and construction experienced in the United States over the last 30 months,” said Dr Ironmonger.

“Although Australia’s latest dwelling approvals show a decline of 7% over the year to August, underlying housing demand from immigration and population growth is much greater than current supply," said Dr Ironmonger. “Households are struggling to maintain real consumption levels however an improvement in retail sales in the three months to August indicates a modest recovery from the slump in early 2008. This week’s expected cut in interest rates will provide households and businesses with further capacity to maintain spending and employment.”

The D&B index for expected sales is down six points to -22, with 22% of executives expecting an increase in sales and 44% expecting a decrease. The profits index is down ten points to -31, with 18% of executives expecting profits to rise and 49% expecting a fall.

Employment expectations are down three points to an index of -14, with 9% of executives expecting an increase in staff and 23% expecting a reduction. Capital investment expectations are up one point to an index of minus six, with 5% of executives expecting an increase and 11% expecting to cut spending. Inventories expectations are down one point to an index of -10.

The selling prices index is up 11 points to an index of 62, with 66% of firms expecting to raise prices and 4% expecting to decrease them.