11 January, 2011
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The latest D&B National Business Expectations Survey shows...
Outlook for the March quarter 2011
- An increase of four points has taken the profits index to 30, the highest level in seven years
- Employment expectations have risen one point to an index of 9, the highest figure recorded in seven years
- Sales expectations are down three points to an index of 31 but still above those of the six years to March quarter 2010
- Although down three points to 10 the inventories index is at the second highest level in seven years
- A fall of four points has taken the capital investment index to 13 but it remains above the figures recorded in the six years to the March quarter 2010
- The selling prices index has fallen three points to 18
Issues expected to influence operations in the March quarter 2011
- Forty percent of executives rank interest rates as the primary influence on their business - this is a rise of 14 percent in two months and the highest figure recorded since May 2009
- Twenty five percent of firms expect wages growth to be the primary influence on operations - down five percent in one month
- Fifteen percent of firms believe access to credit will be the most important business influence in the quarter ahead - unchanged since last month
- Eight percent of firms believe fuel prices will be their main concern in the quarter ahead - down 10 percent in two months
Actual for the September quarter 2010
- Capital investment was positive for the sixth consecutive quarter, with a net index of eight - 13 percent of firms increased investment while five percent cut spending
- Thirty four percent of firms increased sales compared to the September quarter 2009, while 20 percent experienced lower sales
- Thirteen percent of firms increased staff while eight percent reduced employee numbers
- The profits index was up three points to an index of six - twenty four percent of firms increased profits and eighteen percent recorded lower earnings
- The selling price index fell by three points to an index of 11 - twenty two percent of firms raised prices and 11 percent decreased prices.
Australia's economy is becoming increasingly resilient to consumer apathy as firms engaged in business-to-business trade and those exposed to the emerging economies of Asia keep the domestic economy powering ahead even while retailers struggle to convince consumers to spend. These are the emerging trends from the latest Dun & Bradstreet Business Expectations Survey which show near record expectations for sales, profits, capital investment, employment and inventories even while retailers report some of their most difficult circumstances for years.
The latest survey, which examines the March 2011 quarter, shows that although the positive outlook is shared across all sectors, retailers are failing to turn strong expectations into actual performance while firms engaged in business-to-business trade such as manufacturers and wholesalers had a relatively strong finish to 2010 and are buoyant about 2011. While challenging for the retail sector this trend may be positive for the broader economy as households save a higher proportion of disposable income, reducing their debt levels and increasing the pool of savings for investment elsewhere in the economy.
The distinction between retailers and the rest is most apparent in sales performance. Expectations for sales in the quarter ahead remain positive with a net result of 31, a figure that is well above any quarter in the six years ending June 2004 through to March 2010. Forty-eight percent of firms anticipate increased sales while 17 percent believe sales will fall. The sales expectations of retailers is particularly strong, with the retail sales index at 35, three points above the sales indexes for wholesalers and durables manufacturers.
However, despite these significant expectations for the New Year retailers are yet to see strong gains in actual sales. This group's index is at 8 for the September quarter 2010, well below the aggregate index of 14.
The impact of this actual sales performance can be seen in selling price expectations. Overall, the selling price expectations index is down three points to 18. Twenty eight percent of firms expect to raise prices during the March quarter, while 10 percent expect to lower prices. However, of particular note is that the selling price expectations of retailers' (at 17) have fallen 13 percentage points since the previous quarter and are now below the expectations of durables and non-durables manufacturers at 19 and 23 respectively. This indicates that although retailers are expecting strong sales performance in the New Year they may be intending to reduce prices in order to lift sales volumes.
The actual selling prices index for the September quarter 2010 reveals that 22 percent of firms raised prices (compared to a year earlier), while 11 percent discounted their stock. The net index for the September quarter was 11 - this is a fall of three percentage points on the June quarter.
A similar pattern can be seen in profit expectations. This index has climbed to its highest level in seven years with a net index of 30 and the positive outlook shared across all sectors. Just fewer than half of firms (45 percent) expect profits will increase during the March quarter, while 15 percent anticipate a decrease. Retailers and durables manufacturers have the highest profit expectations indexes at 35.
However, examining the reported actual results for the September 2010 quarter reveals the distinction between retailers and the rest. The actual index for those engaged in the production of durable manufacturers was 11 while the actual index for retailers was -1.
The sales and profit performance of retailers is showing through in inventory expectations. Overall, the inventories index is currently at the second highest level (10) recorded in the more than six years since the June quarter 2004. Twenty three percent of executives expect to increase inventories during the March quarter 2011, while 13 percent plan to reduce stock levels. The high levels of the inventories expectations index come on the back of four consecutive quarters (December 2009-September 2010) of positive inventories growth. In the last two quarters firms recorded the highest levels of inventories growth since December quarter 2007.
Wholesalers have the highest expectations with a net index of 14 while retailers and non-durables manufacturers have the lowest inventories expectations, both with net indexes of seven. This indicates that retailers are already carrying ample stock to meet their expected increase in sales over the Christmas and New Year period and will not be required to increase inventories until later in 2011.
Employment expectations are up one point on the December quarter 2010, taking the net index to nine. Fifteen percent of firms are planning to increase staff levels during the March quarter, while six percent expect to reduce employee numbers. Durables manufacturers have the highest net index at 14, whilst non-durables manufacturers have the lowest index of 4.
During the September quarter a net five percent of firms increased staff levels. The wholesalers' employment index was the highest of all sectors, with a net seven percent of firms taking on new staff.
The strength of non-retailers is also revealed in capital investment expectations. While there has been a fall of four points to 13 when examining all sectors the index remains above the figures recorded in the six years from the March quarter 2004 to the March quarter 2010. Seventeen percent of executives expect to increase capital spending, while four percent expect to cut their level of investment. Looking at capital expectations by sector reveals that non-durables manufacturers have slightly higher expectations for capital investment than other sectors, with the net index at 15. Retailers have the lowest net index of 10.
This fall in investment expectations follows a lower net index (8) for actual capital expenditure during the September quarter. This was a fall of seven points from the June quarter index of 15 when the highest actual index in seven years was recorded.
Dun & Bradstreet Director of Corporate Affairs Damian Karmelich believes the results signal the clear gap that is emerging between retailers and the rest and provide further insight into the real strength of the Australian economy.
"During the Christmas period there has been an understandable focus on the challenges faced by retailers and the survey shows that retailers are preparing to discount in response to those challenges. However, for firms engaged in business-to-business trade and exposed to the growth of emerging economies like China the outlook is positive", said Mr Karmelich.
"There is a clear distinction between retailers and the rest in actual performance. The non-retail sector is driving the economy while retailers struggle with household deleveraging."
The latest Business Expectations Survey also reveals that 41 percent of firms expect slow growth in demand to be the primary barrier to growth in the year ahead. Nineteen percent of firms perceive skilled labour issues to be a barrier, 12 percent expect funding to impact their ability to expand and 24 percent don't see any major barrier to growth.
Forty two percent of executives are planning to reduce their level of debt in the next three months - a rise from 36 percent in November. Meanwhile, just seven percent of firms expect to increase debt levels and 50 percent plan to maintain current funding arrangements. In addition, 33 percent of executives indicated that they intend to increase their cash reserves - this is a fall of 10 percentage points since October.
The impact of tighter lending conditions appears to be stable, with 12 percent of executives reporting better access to credit in the last quarter and 11 percent reporting less 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 15 percent (unchanged since last month). Meanwhile, 40 percent of businesses rank interest rates as their primary concern, 25 percent consider wages growth to be the major influence on their business and only 8 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 outlook for the Australian economy is for sound growth in 2011 "Although consumers are saving a higher
proportion of disposable income, strong employment and income growth is continuing with only modest inflation pressure," said Dr Ironmonger.
"The Reserve Bank's latest monetary policy meeting found there was a rebalancing of growth from public to private demand, an easing of the availability of bank financing and a positive outlook for business investment. Hence interest rate policy was unchanged.
"The D&B survey reveals that businesses are maintaining high expectations for growth in sales, profits and employment for the last quarter of 2010 and the first quarter of 2011. It also shows that Australian executives are expecting a relatively low level of growth in selling prices. This follows even lower actual increases in selling prices in the six quarters up to September 2010."
The D&B index for expected sales is down 3 points to 31, with 48 percent of executives expecting an increase in sales and 17 percent expecting a decrease. The profits index is up 4 points to 30, with 45 percent of executives expecting profits to rise and 15 percent expecting a fall.
Employment expectations are up 1 point to an index of 9, with 15 percent of executives expecting an increase in staff and 6 percent expecting a reduction. Capital investment expectations are down 4 points an index of 13, with 17 percent of executives expecting an increase and 4 percent expecting to cut spending. Inventories expectations are down 3 points to an index of 10. The selling prices index is down 3 points to an index of 18, with 28 percent of firms expecting to raise prices and 10 percent expecting to decrease them.
About the survey
D&B Australasia conducted the latest Business Expectations Survey in December 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.
