Borrowing and investment intentions stall

Despite earlier indications that the business sector would take steady steps forward this year, the latest survey of Australian firms reveals that expectations and levels of optimism have returned to 2014 levels.

According to Dun & Bradstreet's Business Expectations Survey, the percentage of businesses that are more optimistic about growth in the next 12-months has fallen to the same level measured a year earlier. After lifting through the December quarter and reaching 73 per cent in January, 64 per cent of businesses are now more positive about growth in 2015 compared to last year.

Despite last month's interest rate cut, Dun & Bradstreet has also revealed little movement in the number of businesses that plan to access new finance or credit to grow their operations. Of the businesses surveyed, 19 per cent plan to seek new credit in the June quarter, flat from the 18 per cent measured at the same time last year.

BEX Q2 2015 - interim - chart1

The soft optimism and borrowing outlook is matched by concerns from businesses that demand will remain weak in the near-term. According to Dun & Bradstreet, businesses consider a lack of demand for their products as the biggest barrier to growth this year (20 per cent), ahead of other issues including online selling by competitors (12 per cent ), skilled labour (11 per cent), operating costs (11 per cent) and access to funding (8 per cent).

The subdued sentiment evident in the Business Expectations Survey extends through to investment plans and follows analysis from the Australian Bureau of Statistics showing that capital expenditure declined 2.2 per cent in the final quarter of last year.

Dun & Bradstreet's Capital Investment Index for the June quarter has eased to 14.8 points from 14.9 points three months earlier. Twenty-two per cent of businesses plan to increase their level of investment in Q2 2015, while seven per cent will reduce their spending and 70 per cent will maintain the same investment levels as last year.

BEX Q2 2015 - interim - chart2

According to Gareth Jones, CEO of Dun & Bradstreet in Australia and New Zealand, in the absence of sustained positive news on the economy, business sentiment has stalled.

"The relatively upbeat mood that was evident among a number of sectors at the end of last year and into January appears to have faded," said Mr Jones.

"Taking a simple net-balance view, businesses are being exposed to more negative economic news than positive, which is undermining confidence and influencing near-term expectations.

"Despite the dips, these latest forecasts are more closely aligned with the actual performance being reported by businesses which suggests that we are seeing a cooling of expectations to more realistic levels.

"And while it appears less-and-less likely that 2015 will deliver a breakout in business performance, there remains a clear - albeit slow - upward trend in the business outlook," added Mr Jones.

Businesses wary of the economy's health following last month's rate cut, falling wages growth, weak consumer confidence and rising unemployment, have also pulled back their expectations for sales, profits and employment.

After rising across the past two quarters, Dun & Bradstreet's Sales Expectations Index has dropped to 34.8 points for the June quarter, down from 38.7 points in the prior quarter and flat against a reading of 33.6 points last year. Forty-eight per cent of businesses now anticipate higher sales in the next three months, while 13 per cent expect a decline and 39 per cent no change.

Despite shaky consumer confidence, businesses in the services sector are the most upbeat about sales, with 56 per cent expecting a lift in trade during the June quarter, while just nine per cent anticipate a contraction. At 47.0 points, the Sales Expectations Index for the services sector is 12.2 points above the all-industry index, and up on the 39.3 points measured for the sector last quarter.

BEX Q2 2015 - interim - chart3

The outlook for earnings has also fallen, with the Profits Expectations Index dipping from 25.9 points to 19.3 points quarter-on-quarter, and from 20.7 points a year earlier. Thirty-seven per cent of businesses surveyed now anticipate a lift in earnings during the June quarter, while 18 per cent expect to see their profits fall compared to the year before.

The fall in expectations is most pronounced among wholesalers, with 17 per cent expecting lower earnings next quarter against the 30 per cent that anticipate an increase. At 12.8 points the sector's Profits Expectations Index is at its lowest level since Q3 2012 and down from 16.8 points last quarter and 12.9 points last year.

BEX Q2 2015 - interim - chart4

Meanwhile, after reporting a surprising jump in employment intentions last month, businesses have cooled on near-term hiring plans.

With 27 per cent of firms planning to add new staff in the June quarter compared to 12 per cent that will cut their numbers, the Employment Expectations Index is 15.0 points, down from 16.1 points for the March quarter, although it remains stronger than the 9.2 points recorded at the same time last year.

Hiring expectations are weakest among retailers, with 21 per cent planning to employ new staff in the second quarter, while 10 per cent will reduce employment. At 11.8 points the Employment Expectations Index among retailers has fallen from 15.3 points last quarter.

BEX Q2 2015 - interim - chart5

According to Stephen Koukoulas, Economic Advisor to Dun & Bradstreet, the survey findings reflect the trajectory of the economy this year.

"All aspects of business expectations have tilted lower over the past quarter, a trend that is consistent with the subdued nature of economic growth early in 2015.

"The turn lower has been particularly obvious in expected sales and profitability which suggests economic growth will remain below trend during the first half.

"The previously positive readings for expected employment and levels of capital expenditure also appear to have topped out, although at this stage the quarterly falls are marginal.

"With expectations for a much-needed, sustained upswing in business investment and employment having stalled, it is likely that the RBA will need to provide further monetary policy stimulus in the near term," Mr Koukoulas added. 

The latest D&B Business Expectations Survey shows:

Expectations index for the June quarter 2015

  • The employment expectations index has fallen to 15.0 points from 16.1 points in the previous quarter, and up from 9.2 points a year ago.
  • The sales index has dropped to 34.8 points, down from 38.7 points in the previous quarter and up marginally from 33.6 points a year earlier. 
  • Profits expectations for the quarter are down, with the index at 19.3 points compared to 25.9 points last quarter and 20.7 points last year.
  • Plans for capital investment have eased to 14.8 points from 14.9 points last quarter, and up from 10.0 points a year earlier.
  • The selling prices index has dropped off to 25.4 points from 26.3 points, although is above last year's level of 24.2 points.

Issues expected to influence operations in the June quarter 2015

  • 64 per cent of businesses are more optimistic about growth in the next 12 months compared to 2014, while 27 per cent is less optimistic. Nine per cent is undecided.
  • Cash flow (29 per cent) is identified as the issue most likely to influence business operations in the next quarter, followed by the level of the Australian dollar (23 per cent).
  • 20 per cent of businesses see weak demand for their products and services as their biggest barrier to growth in the year ahead, while 12 per cent consider the online selling of competitors as the next likely obstacle.
  • 34 per cent of businesses reported having a customer or supplier that became insolvent, or was otherwise unable to pay them in the past year.
  • 44 per cent of businesses would choose to miss payments to trade suppliers if unable to pay all their bills on time, followed by a credit card (20 per cent).
  • 33 per cent of businesses expect no impact from the current level of the Australian dollar, while 25 per cent expect a positive impact and 37 per cent a negative impact. Five per cent is undecided.
  • 19 per cent of businesses intend to seek finance or new credit in the quarter ahead to help their business grow, while 74 per cent will not. Seven per cent is undecided.

Actual results reported for the December quarter 2014

  • Actual employment reported is up to 14.1 points compared to 8.5 points last quarter and 3.5 points last year.
  • Sales activity lifted compared to the previous quarter, from 17.3 points to 27.6 points, and is up on last year's level of 17.6 points. 
  • The actual profits index lifted to 13.9 points from 7.8 points last quarter and 3.9 points last year.
  • Capital investment activity edged up from 10.2 points to 12.6 points quarter-on-quarter, and up from 6.0 points last year.
  • Selling prices were raised in the last quarter, with the index up to 19.4 points from 16.9 points, and up slightly from 14.9 points last year.