Australian Businesses Adopt Wait and See Approach on Stimulus

Global and domestic stimulus plans have not yet shifted business expectations as executives continue to report a negative outlook for profits, sales and capital investment and employment expectations deteriorate even further.

The data is from the latest D&B Business Expectations Survey which shows that all key indices, excluding selling prices, remain deep in negative territory with little sign that executives are preparing for an upturn any time soon.

Fifty-seven percent of firms anticipate declining sales and 64 percent have the same expectation for profits. Expectations for employment and capital investment are following the same downward trend, with 28 percent of firms expecting to cut back on staff and 12 percent anticipating a need to decrease capital investment.

In a further sign that businesses continue to have a downbeat outlook, expectations for inventory growth are at the lowest level since the 1991 recession signalling that executives plan to cut back on existing stock and wait and see before replacing it.

Selling price expectations rose by 30 percent in the nine months from March quarter 2008 to December quarter 2008 and hit their highest level ever recorded in the March 2009 quarter. Expectations have dropped back 5 percent for the June quarter, however three in four (74 percent) firms expect that they will raise prices.

Changing credit market conditions and a falling Aussie dollar continue to impact firms, with more than five in ten (51 percent) businesses negatively impacted by the credit market and two in three (67 percent) hurt by the falling value of the dollar. Wholesale businesses have reported the largest swing, with 43 percent indicating a positive impact in July and 81 percent now noting a negative affect of the dollar.

Downward movements in petrol prices have shown through with a decline since September of 92 percent in the number of executives negatively affected by fuel costs. Fewer than 2 percent of firms now report a negative impact while 43 percent report a positive affect.

Dun & Bradstreet CEO Christine Christian believes the most recent data is a sign that while executives are broadly supportive of government stimulus plans they are yet to witness real benefits and don’t expect to for several months.

“The Government’s stimulus packages are critical to providing support for business. However, the deteriorating outlook, particularly for employment, is a sign that no one expects the benefits to be realised immediately and that things are likely to get worse before they get better”, said Ms Christian.

“The deteriorating outlook for inventories is a clear sign that executives are adopting a wait and see approach as they seek to tightly manage costs.”

The pause in the reductions in the official cash rate in March has impacted executives’ views on the issues that will influence their operations most in the June 2009 quarter. Forty eight per cent of executives now rank interest rates as the primary influence on their business in the quarter ahead, down from 58% in February.

Lower fuel prices have also had an impact on Australian firms. Twenty per cent of executives anticipate that fuel prices will have the most significant influence on their operations in the June quarter, up 6% in one month. Meanwhile 16% of firms rank wages growth as their primary concern, an increase of 2% since February.

According to Dr Duncan Ironmonger, Dun & Bradstreet’s economic consultant, the latest ABS data on retail sales and building approvals give mixed signals about the direction of the economy.

“Therefore, although the Reserve Bank has room for more cuts in interest rates, it is likely to leave rates unchanged this week. Housing interest rates and business lending rates are at historically low levels. The dramatic cut of 400 basis points in official rates will continue to have positive effects on consumer spending and housing construction over the months ahead,” said Dr Ironmonger.

“In addition, the Government’s second stimulus package this month will boost household spending and further stimulus will follow from the subsequent boost to public infrastructure spending.

The D&B index for expected sales is down 9 points to -48, with 9% of executives expecting an increase in sales and 57% expecting a decrease. The profits index is down 10 points to -57, with 7% of executives expecting profits to rise and 64% expecting a fall.

Employment expectations are down 12 points an index of -26, with 2% of executives expecting an increase in staff and 28% expecting a reduction. Capital investment expectations are down three points to an index of minus ten, with 2% of executives expecting an increase and 12% expecting to cut spending. Inventories expectations are down five points an index of -18.

The selling prices index is down five points to an index of 70, with 74% of firms expecting to raise prices and 4% expecting to decrease them.