Expectations drop for new financial year

Business expectations for the start of the next financial year have dropped sharply despite business friendly concessions in last month’s Federal Budget.

According to Dun & Bradstreet’s Business Expectations Survey, business executives have returned a weak third quarter outlook on their expected sales, profits, investments and employment levels, taking the Business Expectations Index down to 13.4 points from 20.7 points in the previous quarter and 19.5 points at the same time last year.

The sharp drop in third quarter expectations confirms that businesses are looking beyond this year for support from an economy that is growing at less than three per cent. Concerns about the current and short-term potential of the Australian economy were reinforced by last week’s capital expenditure numbers from the ABS, which showed a seasonally-adjusted 4.4 per cent drop in Q1 2015.

During the same period, Dun & Bradstreet’s survey found that business performance across sales, profits, employment and investment also fell, with the Business Actuals Index dropping from 15.5 points in Q4 2014 to 8.1 points in Q1 2015.

The Business Expectations Index is an aggregate of the survey’s measures of sales, profits, employment and investment expectations.

“While this recent correction in the business outlook is from a relatively high point, its trajectory is worrying, as is the drop away in the actual performance reported by businesses for the past quarter,” said Gareth Jones, CEO of Dun & Bradstreet–Australia & New Zealand.

“It appears that businesses, despite stimulatory news in the budget, have shelved expansion plans until the end of this year at the earliest.

“Demand remains the key missing ingredient, as demonstrated by the latest capex figures and by what businesses are reporting through our monthly survey,” Mr Jones added.

Twenty-four percent of businesses surveyed by Dun & Bradstreet reported a weak demand for their products and services as their biggest barrier to growth in the coming year; the most common response ahead of other factors including online selling by competitors (15 per cent), cash flow (14 per cent) and operating costs (13 per cent).

Additionally, the mood of consumers continues to worry businesses, with 38 per cent nominating consumer confidence as the issue that will most influence their operations in the third quarter of the year.

Reflecting business concerns about demand, the Sales Expectations Index for Q3 2015 has fallen sharply to 24 points, down from 32.7 points in the previous quarter and 32.5 points last year. The drop came with 38 per cent of businesses expecting increased sales in the next quarter, down from 43 per cent a year ago. At the same time, the proportion of businesses anticipating fewer sales climbed from 11 per cent to 14 per cent.

Compared to last year, sales expectations have fallen most noticeably in the manufacturing, wholesale and construction sectors. The proportion of manufacturers expecting increased sales in the third quarter of the year dropped from 52 per cent to 39 per cent, and from 52 per cent to 42 per cent among wholesalers. Meanwhile, the number of construction companies anticipating a fall in their sales levels climbed from 13 per cent to 22 per cent.

While the budget does not appear to have boosted the business outlook among most sectors, retailers have reversed the trend and are anticipating renewed spending. The Sales Expectations Index for retailers has risen to 34.5 points for Q3 2015 up from 30.8 points in the previous quarter and 20.9 points last year. According to the Dun & Bradstreet survey, 48 per cent of retailers expect increased sales, up from 45 per cent last quarter and 33 per cent last year.

Similarly, profit expectations among retailers have increased against the overall trend. Thirty-seven per cent of businesses in the retail sector have forecast higher profits next quarter, an increase from 32 per cent in the previous quarter and 24 per cent in the year prior. The response has taken the sector’s Profit Expectations Index to 18.9 points, up from 16.3 points last quarter and just 1.3 points in 2014.

In comparison, profit expectations across all industries have fallen, with the index moving down to 12.6 points from 18.1 points in the previous quarter and 19.9 points in the previous year.

After showing some resistance through the beginning of the year, employment plans have also dropped sharply. The Employment Expectations Index for the third quarter of the year is 8.9 points, down from 16.8 points in the second quarter and 12.7 points last year. While 21 per cent of survey respondents intend to hire in the third quarter, 12 per cent plan to cut numbers and the majority leave their staffing levels unchanged.

“The economy appears to have hit a brick wall,” said Stephen Koukoulas, Economic Adviser to Dun & Bradstreet.

“The severe slumps in expected sales and employment are particularly worrying for the business outlook, while the actual performance of the economy has also undershot prior expectations.

“Businesses that reported relatively optimistic conditions early in 2015 are now facing the reality of an underperforming economy and their responses to this survey suggest there is some risk that the unemployment rate will rise further during the second half of 2015,” Mr Koukoulas added.