The optimism seen in September’s Business Expectations Survey has waned in October, with businesses flagging a drop in sales, selling prices, employment, profit and investment in the first quarter of 2016. A decrease across all expected indices has not been seen since the June quarter of 2013.
Dun & Bradstreet’s Business Expectations Index, the average of the survey’s measures of sales, profits, employment and investment, has dropped to 17.7 points for Q1 2016, down from 21.8 points for Q4 2015. However, the index is still up slightly from the low of 17.2 points recorded for Q3 2015.
The disparity between expected activity and actual activity has narrowed to 5.4 points in the September quarter, down from 9.9 points in the June quarter and significantly lower than its annual high of 17.3 points in the March quarter of 2015.
While the Business Expectations Index for Q1 2016 has edged lower, the measure of optimism remains relatively high, with 62 per cent of businesses feeling more optimistic about growing their business in 2016 compared to 2015, down slightly from 66 per cent in the previous quarter. However, the recent change in Prime Minister and Treasurer does not appear to have influenced the general outlook, with 57 per cent of respondents expecting no change to their business operations as a result of the leadership spill. It is worth noting that, of the remainder, 32 per cent expect a positive impact, with just 3 per cent expecting a negative impact, while 9 per cent are unsure.
According to Adam Siddique, Head of Group Development at Dun & Bradstreet, the latest results suggest business remains in a strong position, but underlying demand is insufficient to spur investment and borrowing.
“The business sector has delivered a broadly positive or indifferent response to the changes in Canberra, although this hasn’t translated into more optimistic expectations. It seems businesses need more time to gauge what, if any, impact the new leadership will have on their outlook.
“While preliminary, these latest results also indicate a concerning downward trend across all key readings. Combined with our recent Trade Payments Analysis report, we’re increasingly seeing a corporate landscape comprised of businesses with strong balance sheet positions, but lacking the confidence to exploit the generally benign economic conditions through borrowing or investment of surplus capital,” Mr Siddique said.
“The deciding factors that could break the deadlock remain demand and consumer confidence. The subsequent surveys will demonstrate whether businesses expect these key metrics to shift significantly in the short- to medium-term,” he added.
“The narrowing of the gap between expectations and actual results is good to see, as it indicates business owners are better able to assess demand, which will enable them to identify revenue generating price points for goods and services,” Mr Siddique said.
The decline in business expectations was observed across six of the seven industries surveyed, with Construction the exception. Within the construction sector, all expected indices for the March quarter increased. The sharpest rise was in the Sales Index, which surged from 30.7 to 44.9 points.
Meanwhile, all industries except Wholesale and Transport, Communications & Utilities reported an increase in business activity for the September quarter. The Wholesale sector’s Business Actuals Index dropped from 15 points in the June quarter to -3.3 points in the September quarter, while the Transport, Communications & Utilities Business Actuals Index fell from 14.1 points to 6.8 points.
The lowered expectations for the March quarter come despite an increase in the Sales, Employment and Profit Actual Indices for the September quarter, bringing the Business Actuals Index up to 11.8 points from 10.1 points in the previous quarter.
Capital Investment was the only actuals index that fell in Q3, dropping to 6 points, down from 8.3 points in Q2.
Some 19 per cent of businesses said they had increased capital investment spending in the September quarter, while 11 per cent said they had decreased spending in this area. The vast majority (62 per cent) said they had not made any change to their capital investment spend in Q3, or were unsure. This trend was neatly reflected by Capital Investment expectations for the first quarter of 2016, with 21 per cent of businesses saying they expect to increase spending, 11 per cent expecting to spend less and 60 per cent expecting no change/unsure. Borrowing intentions remained low, with 75 per cent of businesses saying they were unlikely to seek finance or credit in Q1 2016.
According to Stephen Koukoulas, Economics Advisor to Dun & Bradstreet, “The recent political changes in Canberra have not been enough to see the business sector maintain its previously quite upbeat expectations for the economy. Indeed, since the change in leadership, the Business Expectations Index has dropped to its lowest level since the survey was conducted in the June quarter of 2015.
“The majority of businesses think that the political changes will have no impact on their activity even though one-third are expecting Mr Turnbull as Prime Minister to have a policy structure that will improve their business prospects”, Mr Koukoulas said.
“More worryingly, all of the main sub-components are trending lower; most notably, the key readings for expected sales, employment and capital expenditure are pointing down. This does not bode well for the economy as 2015 draws to an end and 2016 approaches. It is a sharp reversal from the generally upbeat tone to business expectations that prevailed throughout most of 2015,” Mr Koukoulas added.
“The faltering in business conditions leaves open the possibility of the RBA cutting interest rates some time in future, although for now, it will be hoping that its more upbeat view for the economy for 2016 will be delivered with the current level of interest rates”, Mr Koukoulas noted.