Business profits and investment to fall in September quarter

Despite a marginal improvement in sentiment, Australia’s business executives remain downbeat about the local business outlook. Expectations for sales, profits, employment, inventories and capital investment all remain in negative territory indicating that further challenges lie ahead.
These findings are from the latest D&B Business Expectations Survey which shows that 43 per cent of firms expect sales to decrease in the September quarter. These expectations reflect the poor results experienced in the March quarter where forty seven per cent of businesses saw a decrease in sales. Yet despite poor March quarter results and significant expectations for reduced sales the index has lifted, with 19 per cent of businesses anticipating an improvement in the September quarter.
The expectations of those in the retail sector have improved more significantly than others, with the retail sales index increasing by 33 points as compared to the June quarter (the index is still in negative territory). However rising unemployment will increase pressure on household spending and consequently retail sales will be impacted leading into 2010.
Also reflecting poor March quarter results, the profits index remains in negative territory. Forty eight precent of executives anticipate that profits will decrease in the September quarter.
Expectations for employment have made a small upward movement but are still in negative territory, with 31 per cent of firms expecting to cut back on staff. Figures released by the Australian Bureau of Statistics reveal that unemployment increased to 5.7% in May 2009 from 5.5% in April. Meanwhile D&B’s latest Economic & Risk Outlook Report forecasts that the unemployment rate will reach 6.5% in 2009.
Capital investment expectations also remain in negative territory, with 16 per cent of firms expect to decrease spending in this area. The latest statistics from the RBA indicate that business lending fell during May – if this trend continues and businesses remain uncertain about the global economic environment future business investment may continue to be paired back. This will likely provide a further brake on economic growth.
Inventory expectations are at the lowest level since the 1991 recession. Twenty two per cent of businesses surveyed expect a decrease in inventories as compared to a year ago. This intention to reduce inventories indicates that businesses need to manage costs while sales expectations gradually recover and accordingly firms are not yet planning to increase existing stock levels.
Selling price expectations have dropped by 18 per cent since the June 2009 quarter, however, three in five (60 per cent) firms expect to raise prices this quarter. Given the current climate, moves to raise prices may be detrimental to sales volumes.
Retailers have the most significant expectations that they will raise prices during the September quarter, with the retail index for selling prices at 62. This follows March quarter results that indicate that a significant number of retail firms raised prices. At an index of 60, retailers are significantly above the other groups.
D&B Expected Sales, Profits, Employment, Capital Investment and Inventories Indexes
Dun & Bradstreet CEO Christine Christian believes the small signs of improvement are positive,  however, the road to recovery still has a long way to go.
“Views about the current state of the local economy vary significantly however our latest survey reveals that Australia’s executives remain largely downbeat about the outlook, said Ms Christian.
“This is a clear indication that we may not experience the V-shaped recovery that some have anticipated. Businesses need to remain focused on managing the challenges that lie ahead as the road to recovery remains long.
“However, there are some signs of promise. Australia is faring better than other developed economies and our businesses are demonstrating that signs of promise are on the horizon. Despite this, we need to see significant and continued improvement in executive expectations before we are confident that the fundamentals exist to put Australia clearly back on the path to growth.”
While 28 per cent of firms believe that the May Federal budget will have a positive impact on their business, credit market conditions continue to have a negative impact. Fifty three per cent of firms indicated that credit market conditions are detrimentally impacting their business, an increase of two per cent in just one quarter. This confirms findings from D&B’s Economic & Risk Outlook Report which states that recent market improvements are more likely to be a correction to market over-reaction rather than the start of a broad-based economic recovery.
Rising business-to-business payment days have had a negative impact on three in ten (31 per cent) firms, up 4 per cent in just one month. Dun & Bradstreet’s own trade payments data indicates that Australian businesses are averaging almost double the standard 30 days term to settle accounts. Payment terms have risen steadily since the global credit crisis was first identified in September 2007, adding additional pressure to business cash flow, which is already being impacted by the slowing economy.
Downward movements in petrol prices have shown through with an 86 per cent decline in the number of executives negatively affected by fuel costs since the September quarter of 2008. Seven per cent of firms now report a negative impact while 41 per cent report a positive affect. Likewise the influence of interest rates has continued to fall in line with the lower RBA cash rate. Thirty two per cent of firms rank interest rates as a major influence on their business, a 26 per cent fall since February 2009.
Reflecting pressure from growing unemployment figures, just 21 per cent of executives expect wages growth to be the primary influence on operations.
According to Dr Duncan Ironmonger, Dun & Bradstreet’s economic consultant, the sharp improvement in the rate of growth of retail sales since November 2008 indicates the strong effect of the government stimulus packages.
“By November the annual rate of growth of retail sales had fallen to just 2 per cent. By May 2009 this has surged to 7.0 per cent, and is now above the long term average annual rate of 6.0 per cent. Continuing low interest rates should help maintain retail sales growth in the months ahead,” said Dr Ironmonger.
“The D&B survey indicates that after four quarters of declining expectations, sales and profits expectations are heading back towards positive territory. The 24 points rises in these indexes are the greatest rises recorded in the history of the survey.”
The D&B index for expected sales is up 24 points to -24, with 19 per cent of executives expecting an increase in sales and 43 per cent expecting a decrease. The profits index is also up 24 points to -33, with 15 per cent of executives expecting profits to rise and 48 per cent expecting a fall.
Employment expectations are up four points an index of -22, with 9 per cent of executives expecting an increase in staff and 31 per cent expecting a reduction. Capital investment expectations are up two points to an index of -8, with 8 per cent of executives expecting an increase and 16 per cent expecting to cut spending. Inventories expectations are unchanged at an index of -18.
The selling prices index is down 18 points to an index of 52, with 60 per cent of firms expecting to raise prices and 8 per cent expecting to decrease them.
Outlook for the September quarter 2009
  • The employment indicator has risen slightly but remains deep in negative territory, 31 per cent of businesses expect to decrease staff in the September quarter.
  • Forty three per cent of firms expect a decrease in sales and forty eight expect a decrease in profits.
  • Three in five businesses (60 per cent) expect to raise prices in the September quarter.
  • Capital investment expectations have improved slightly, but 16 per cent of firms expect to decrease spending in this area.
  • Twenty two per cent of firms plan to decrease inventories in the September quarter Impacts of the Federal budget, credit market conditions and petrol prices.
  • Twenty eight per cent of firms believe the May Federal Budget will have a positive impact on their business.
  • Recent changes in credit market conditions have negatively impacted 53 per cent of firms.
  • Forty per cent of executives indicate that recent movements in petrol prices have positively impacted their business, down 12 per cent in the past month.
Issues expected to influence operations in the September quarter 2009
  • Thirty two per cent of executives rank interest rates as the primary influence on their business in September quarter 2009, a decrease of 26 per cent since February.
  • A rise of 7 per cent since last month has 30 per cent of firms ranking fuel prices as the primary business influence in the quarter ahead.
  • Just 21 per cent of executives expect wages growth to be the primary influence on operations.
Actual for March quarter 2009
  • Forty seven per cent of firms experienced lower sales, down 2 per cent on the December quarter.
  • Fifty five per cent of firms recorded lower profits, down 8 per cent on the December quarter.
  • Fifty seven per cent of firms raised selling prices, down 10 per cent on the December quarter.
  • Twenty eight per cent of firms had fewer staff in the March quarter of 2009 than a year earlier.
  • Fourteen per cent of firms had lower capital investment expenditure.

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