Falling Australian Dollar impacting business costs

After easing in the lead-up to Christmas, prices are expected to begin rising this year with 31 per cent of businesses intending to lift their selling prices in the first quarter, while just four per cent will discount.

Dun & Bradstreet's monthly Business Expectations Survey shows the Selling Price Index for the March quarter lifting to 26.3 points, up from 17.5 points last quarter and 19.5 points last year, to reach its highest level since the third quarter of 2009. The index measures the difference between the percentage of businesses expecting to increase prices minus the percentage intending to decrease prices.

BEX Q1 2015 final - chart 1

The lift in the Selling Price Index continues a steady trend that commenced during the middle of last year and can be tied to a similar movement in the level of the Australian dollar; suggesting that the weakening currency is leading to higher input costs for many local firms. Indicative of this effect, 40 per cent of wholesalers are planning to raise their prices in the coming three months, while just one per cent will reduce.

BEX Q1 2015 - final - chart 2

According to Gareth Jones, CEO of Dun & Bradstreet in Australia & New Zealand, the falling currency is having a mixed impact on the business sector.

"The double-edge nature of currency movements is being borne out in the Business Expectations Survey, with mixed views from businesses on its effect," said Mr Jones.

"While there has undoubtedly been a benefit for sections of the economy, such as manufacturers, the weaker dollar has introduced new cost pressures for businesses and industries that are reliant on imported goods.

"To cover these costs, many operations will be forced to lift their own prices, which will in turn flow through to other businesses and consumers alike," Mr Jones added.

D&B's survey reveals the significance of the level of the dollar on businesses, with 21 per cent listing it has the issue that will influence their operations the most, with 'cash flow' the only more pressing concern (26 per cent) for their operations in Q1 2015.

In addition to selling prices, business expectations for sales, capital investment and employment have increased marginally compared to the previous year. Despite the positive movements, the broad lift in expectations that commenced at the beginning of 2014 appears to be moderating, as more firms forecast flat results. Particularly, the profits outlook for the first quarter of the year is unchanged from last year, while the actual profits index for the September quarter 2014 has fallen from 9.8 points to 7.8 points.

Notably, the percentage of businesses that is more optimistic about growth this year compared to last, has fallen from 74 per cent to 65 per cent month-on-month, and from 68 per cent year-on-year.

BEX Q1 2015 - final - chart 3

According to Stephen Koukoulas, Economic Advisor to Dun & Bradstreet, 2015 is commencing with a broadly positive outlook.

"Despite the fall in optimism and more moderate movements for sales, the early call from businesses is more upbeat than last year," Mr Koukoulas said.

"While expectations for future profits have cooled in light of recent negative news on the economy, there are also positives to be found in the gradually improving picture for business spending and hiring, which fits with recent assessments from the RBA and Treasury.

"Low borrowing rates, cheaper fuel and an improving US economy, meanwhile, provide additional cause for optimism," he added.

About the Survey

Each month business owners and senior executives representing the manufacturing; wholesale; retail; construction; transport, communications and utilities; finance, insurance and real estate; and services sectors across Australia are asked if they expect increases, decreases or no changes in their upcoming quarterly sales, profits, employment, capital investment and selling prices. Since its introduction in Australia in 1988, the survey has proven to be a highly reliable measure of economic performance.

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.

Methodology

Each month D&B asks a sample of executives if they expect an increase, decrease or no change in their quarter-ahead sales, profits, employees, capital investment and selling prices compared with the same quarter a year ago.

The executives are also asked for actual changes over the twelve months to the latest completed quarter.

The Australian survey began in March 1988 obtaining some 900 responses in the third month of each quarter. Since the middle of 1999, the survey has been conducted monthly, initially with about 300 responses each month. From September 2000, responses have been obtained from 400 executives each month.

From July 2005, to simplify the interpretation of the survey data, the results have been presented as a sequence of preliminary, interim and final indexes. The 400 responses from the first month of each quarter give preliminary estimates of the quarter-ahead expectations and the quarter behind actual indexes. The 400 responses from the second month of the quarter are combined with those from the first month as interim estimates of the indexes based on 800 responses. The 400 responses from the third month are combined with those from the first two months to give the final expectations and actual indexes based on all 1,200 responses obtained during each quarter.

In this issue, the preliminary indexes for the latest quarters are based on approximately 800 responses obtained during October and November 2014.