Businesses are expecting to see increased activity as we approach the end of the year, with profit, sales and employment activity all expected to rise during the final quarter.
According to Dun & Bradstreet’s latest Business Expectations Survey, the percentage of businesses with a positive outlook has increased to its highest level since January this year, with 66 per cent of survey respondents feeling more optimistic about growing their business in the year ahead.
Despite the optimistic sentiment, some questions remain regarding the lingering gap between expected and actual results. The two indexes are currently tracking similar trajectories after moving towards alignment during the first half of 2015. A pattern has been established, however, of actual results consistently falling short of expectations.
Dun & Bradstreet’s Business Expectations Index, the average of the survey’s measures of sales, profits, employment and investment, has increased from its Q3 2015 low of 17.2 points, to reach 21.8 points for the December quarter. At this level the index is still below the 23.9 point peak for 2015 recorded in Q1, although it remains higher than the 20.3 points recorded for the same period last year.
According to Adam Siddique, Head of Group Development at Dun & Bradstreet, the Q4 survey results confirm the business community expects economic activity to rise across key areas as we close out the year.
“The leap in positive sentiment indicated by the initial Q4 results has evened out during the quarter to represent a less dramatic swing. Nevertheless, we have seen an unmistakable shift to a more positive outlook compared to the prior quarter in terms of both actual and expected results. It should also be noted that the majority of the indexes remain well above their 10-year averages, which is encouraging as we look to 2016,” Mr Siddique said.
“The local economic climate is still facing external headwinds in the form of mixed data coming out of China and ongoing uncertainty surrounding when the US Federal Reserve will begin increasing interest rates. These macro-economic factors may well be fuelling unease regarding investment planning and the Australian dollar.
“Closer to home, it will be interesting to see how business responds to the recent leadership changes in Canberra, given the new Prime Minister’s focus on economic reform and restoring business confidence,” Mr Siddique added.
The broadly optimistic trend masks the only index to take a backward step during the quarter – Capital Investment Expectations fell from 12.8 points in Q3 to 11.9 points in Q4. This is still higher than the 10.4 points recorded for the same period last year; however, it does mark the lowest point of the year for this index, with 78.4 per cent of businesses expecting to either lower spending or leave current investment plans unchanged.
The Business Expectations Survey revealed Retail continues to be the most optimistic sector in terms of Sales Expectations, with an index score of 51.5 points, against the aggregate score of 38 points. Across all sectors, 49 per cent of businesses expect sales to increase during the third quarter, up from 46.8 per cent at the same time last year and 40 per cent in Q3.
The Actual Selling Prices Index fell to its lowest level since Q4 2013 at 8.9 points, which may be a direct consequence of price reduction intentions flagged in the third quarter. This was reflected by 49 per cent of survey respondents expecting to increase sales in the fourth quarter, the highest percentage since Q4 2010.
The Actual Profit Index, along with Sales and, to a lesser extent, Employment, continues to track below expectations. This jars with the selling price reductions flagged by businesses in the third quarter, although it also suggests that while businesses are optimistic when it comes to potential income from goods sold, they are retaining some margin for further price reductions in order to strengthen demand.
According to Stephen Koukoulas, Economic Adviser to Dun & Bradstreet, the generally upbeat tone in the Dun & Bradstreet survey has continued, although the pace of that expansion is uneven. “The Business Expectations Index remains solidly positive – firms are clearly benefiting from ongoing low interest rates and what is now a very competitive level for the Australian dollar of around 70 US cents”.
“Something of a concern in the survey is that actual levels of sales, employment, profits and capital expenditure have fallen well below expectations. In other words, the generally upbeat view of the business sector has not translated into an actual lift in business activity. This is something that has puzzled the Reserve Bank of Australia Governor, Glenn Stevens, for some time,” Mr Koukoulas noted.
“The range of economic news over the past month, including the generally positive tone of business expectations, means that the RBA is likely to keep interest rates steady at today’s Board meeting.”
Mr Koukoulas added, “The bulk of the survey responses pre-dated the political changes regarding the new Prime Minister and Ministry, so it is not clear whether this has filtered into a more positive business outlook. Next month’s survey will be able to shed some light on that”.