Sharp turnaround in business expectations

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 per cent of firms expect an increase in sales in the December 2009 quarter, while 22 per cent 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 firms’ 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 per cent 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 per cent in retail sales for the month of June.
Capital investment expectations also entered positive territory, with 17 per cent of firms expecting to increase investment and five per cent 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 continues.
Expectations for employment have made a large upward movement, with 15 per cent of firms expecting to increase staff and eight per cent 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 5.8 per cent 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 per cent since the March quarter of 2009. One in three (35 per cent) firms expects to raise prices in the December quarter, while eight per cent 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 that 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 per cent of executives now anticipate that profits will increase in the December quarter, while 20 per cent 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 per cent 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.
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.”
Outlook for the December quarter 2009
  • Sales and profits expectations have recorded the greatest one-quarter rises since the survey began – 44 per cent of respondents expect an increase in sales and 31 per cent expect an increase in profits.
  • The employment indicator has also risen sharply with 15 per cent of businesses expecting to increase staff in the December quarter and 8 per cent anticipating a decrease.
  • Capital investment expectations are at the highest level in six years – 17 per cent of firms expect an increase in this area and five per cent expect a decrease.
  • Expectations for growth in inventories has reached the highest level in five years – 18 per cent of firms plan to increase stock while 10 per cent expect to decrease inventories.
  • Selling price expectations have fallen to the lowest level in more than four years – 35 per cent of firms expect to increase prices and 8 per cent 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 per cent experienced a positive impact.
  • 49 per cent 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 per cent of executives rank wages growth as the primary influence on their business in December quarter 2009, while 30 per cent expect interest rates to be their main concern and 20 per cent believe fuel prices will have the most significant influence Actual for June quarter 2009.
  • Forty per cent of firms experienced lower sales as compared to the June quarter 2008, while 26 per cent increased sales.
  • Thirty eight per cent of firms recorded lower profits while 18 per cent increased profits.
  • Thirty one per cent of firms raised selling prices, while 12 per cent decreased prices.
  • Twenty one per cent of firms had fewer staff and eleven per cent had more staff in the June quarter of 2009.
  • Seventeen per cent of firms spent more on capital investment (the highest in more than five years), while 7 per cent decreased expenditure in this area.

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