8 February, 2011
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The latest D&B National Business Expectations Survey shows...
Outlook for the June quarter 2011
- Employment expectations have risen two points to an index of 11, the highest figure recorded in more than seven years
- A decrease of seven points has taken the profits index to 23, still a higher level than any recorded in the five years to September quarter 2010
- Although down three points to 7, the inventories index is still higher than any in the five years to March quarter 2010
- Sales expectations are down 16 points to an index of 15, the lowest of the latest seven quarters
- A fall of seven points has taken the capital investment index to 6, well down on the previous four quarters but equal to the average index of the last 10 years
- The selling prices index is down one point to 17, being relatively steady for the last five quarters
Issues expected to influence operations in the June quarter 2011
- Twenty seven percent of executives rank interest rates as the primary influence on their business - this is a fall of 13 percent in a month back to the lower levels of concern in September and October last year
- Twenty seven percent of firms expect wages growth to be the primary influence on operations - up two percent in one month
- Eighteen percent of firms believe access to credit will be the most important business influence in the quarter ahead - up three percent since last month
- Eighteen percent of firms believe fuel prices will be their main concern in the quarter ahead - up 10 percent in one month
Actual for the December quarter 2010
- Capital investment was positive for the seventh consecutive quarter, with a net index of five - 11 percent of firms increased investment while six percent cut spending
- Twenty one percent of firms increased sales compared to the December quarter 2009, while 20 percent experienced lower sales
- Fourteen percent of firms increased staff while nine percent reduced employee numbers
- The profits index was down seven points to an index of minus one - twenty percent of firms increased profits and twenty one percent recorded lower earnings
- The selling price index rose by six points to an index of 17 - twenty four percent of firms raised prices and seven percent decreased prices.
Competition for labour and the potential impact on wages are the issues most likely to affect business conditions heading into the middle of the year as executives report an overall easing in expectations for sales, profits, inventories and capital investment after recent highs. These are the findings from the latest Dun & Bradstreet Business Expectations Survey, which examines the expectations of executives for the June quarter 2011.
Employment expectations are now at their highest level in more than seven years at a net index of 11. This follows a net 5 percent of firms increasing staff levels in the December quarter. The non-durables manufacturers' employment index was the highest of all sectors, with a net 9 percent of firms taking on new staff.
With unemployment levels already down to 4.98 percent from the peak of 5.83 percent in June 2009 firms are expecting that the competition for labour, particularly skilled labour, will drive up wages. This in turn is contributing to declining profits expectations. Twenty-seven percent of executives identify wages growth as their primary concern for the June quarter with these higher costs flowing through to profit expectations, which have declined 7 points to a net index of 23.
This impact on margins comes at the same time as executives report an easing in sales expectations, which have dropped 16 points to a net index of 15. This is the lowest level of expectations for sales in over 18 months. Only non-durables manufacturers have higher expectations for sales growth in the June quarter than for the current March quarter. All other sectors have lowered their sales expectations for the June quarter 2010. Surprisingly, retailers have relatively robust sales expectations although selling price expectations indicate this is a result of discounting.
Selling price expectations for the retail sector sit at a net index of 14 compared to overall expectations at a net index of 17. This means retailers have lower expectations on average of a capacity to increase selling prices in the June quarter and these expectations have dropped 16 percentage points over the last two quarters. However, this strategy appears to be working in the short term with the December quarter actual sales index for retailers in positive territory at a net index of 6. Retailers were the only sector to report a positive outcome in December quarter sales.
The sales and profit performance is impacting inventory expectations. This index is down 3 points to 7 but is still higher than any recorded in the five years to March quarter 2010. Twenty one percent of executives expect to increase inventories during the June quarter 2011, while 14 percent plan to reduce stock levels. The reduction in the inventories expectations index has come on the back of the first quarter of negative actual inventories growth in more than a year. In December quarter 2010 firms recorded a net actual index of -3 for inventories growth.
There has been a significant drop in capital investment expectations, which have fallen 7 points to 6 in the overall index. Fourteen percent of executives expect to increase capital spending, while 8 percent expect to cut their level of investment. This fall in investment expectations follows a lower net index (5) for actual capital expenditure during the December quarter. This was a fall of 10 points from the June quarter index of 15 when the highest actual index in seven years was recorded.
Overall, the survey suggests a robust economic outlook. While there is clearly a general easing in sentiment most indices are at five year highs. However, a tight labour market and events such as the Queensland floods are likely to impact performance.
Dun & Bradstreet CEO Christine Christian believes that while the results are robust there are signs of capacity constraints in the economy.
"Overall, the signs are positive for the economy. However, the increasing demand for labour and the expected impact on wages does point to some capacity constraints and if this continues it is likely to eventually show up in inflation", said Ms Christian.
"Business executives must be attuned to these emerging constraints and seek to limit the impact on margins. Policy makers will need to ensure the supply of skilled labour can keep up with demand in order to avoid wages growth adding to the inflationary pressure that is already likely to emerge as a result of the Queensland floods and cyclone."
The latest Business Expectations Survey also reveals that 47 percent of executives see that a continuing strong Australian dollar will have a positive impact on their business in the quarter ahead - for 18 percent a significant impact. Only 11 percent expect a high dollar to have a negative impact; for 42 percent it will have no impact.
Forty three percent of executives indicated that they intend to increase their cash reserves in the next three months - this is a rise of 10 percentage points in one month. Only 14 percent of executives are likely to seek finance or credit to grow their business in the quarter ahead, with 76 per cent not likely and 10 per cent not sure.
However, the number of firms indicating that access to credit will be the most significant influence on their business in the quarter ahead is 18 percent (up three percent since last month). Meanwhile, 27 percent of businesses rank interest rates as their primary concern, 27 percent consider wages growth to be the major influence on their business and 18 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 strong growth in employment through the first half of 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 the recent moderate inflation outcome was assisted by the high level of the exchange rate, a decline in wages growth and strong competition. Hence interest rate policy was unchanged.
"The D&B survey reveals that businesses are maintaining relatively high growth expectations for growth in profits and inventories on top of high expectations for growth in employment for the second quarter of 2011. It also shows that Australian executives are expecting a relatively low level of growth in selling prices."
The D&B index for expected sales is down 16 points to 15, with 35 percent of executives expecting an increase in sales and 20 percent expecting a decrease. The profits index is down 7 points to 23, with 38 percent of executives expecting profits to rise and 15 percent expecting a fall.
Employment expectations are up 2 points to an index of 11, with 21 percent of executives expecting an increase in staff and 10 percent expecting a reduction. Capital investment expectations are down 7 points an index of 6, with 14 percent of executives expecting an increase and 8 percent expecting to cut spending. Inventories expectations are down 3 points to an index of 7. The selling prices index is down 1 point to an index of 17, with 28 percent of firms expecting to raise prices and 11 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.
