Executives expecting strong finish to financial year

The latest Dun & Bradstreet Business Expectations Survey for the June 2010 quarter shows that Australian executives are looking to finish the financial year strongly; however, expectations for employment growth and increased selling prices and concerns about wage increases point to capacity constraints in the economy.

The profits index is at its highest level in five years and is 74 points higher than the trough of the June 2009 quarter. Twenty-nine percent of respondents expect their profits levels to increase in the June quarter.

The expected sales index rose five points to 33, exceeding the strong positive level of the two previous quarters. The index is now at the highest level in six years and is up 81 points on the trough of the June 2009 quarter. Forty-five per cent of firms expect an increase in sales and a 12% decrease in sales in the June 2010 quarter.

In response to these strong sales expectations, inventory levels expectations are also increasing. Inventory level expectations for the June 2010 quarter are at the highest point in over five years. Eighteen per cent of executives expect to increase inventories, while 9% plan to reduce levels.

Capital investment expectations moved up nine points from the previous quarter, reaching the highest level in more than six years, 26 percentage points higher than the June 2009 quarter. Eighteen per cent of firms expect to increase capital investment, while 2% plan to decrease spending in this area.

Actual capital investment in December 2009 quarter is the highest in over six years, with three positive quarters after five negative quarters from March 2008 to March 2009. Sixteen per cent of firms had more capital investment and 4% less capital investment than in the December 2008 quarter. The December 2009 quarter was the first quarter in two years that all sectors had actual capital investment levels in positive territory.

Employment expectations for the June 2010 quarter are nine percentage points higher than the March quarter, with 14% of firms planning to increase staff levels and 5% reducing employee numbers.

These figures are a 35% improvement on the June 2009 quarter expected employment index of -26 percentage points. All sectors now have positive expectations for growth in employment numbers, only the second time since the June 2008 quarter.

While these results are positive for the Australian economy, they do signal an increase in competition for labour and raw materials, pointing to potential capacity constraints in the economy. In response, expectations for selling prices have risen by ten percentage points to an index of 19, the first rise in five quarters. This is a clear sign that executives are expecting to recoup some of their increased costs through increased prices, signalling the return of inflationary pressures in the economy. Twenty-six per cent of firms expect to raise prices in the June quarter, while 7% expect to lower prices.

According to Dun & Bradstreet CEO Christine Christian, the improved expectations across all indices indicate that Australian executives believe that FY2010 will be far more promising than the preceding year: “There had clearly been a great deal of caution shown by Australian executives in the second half of 2009, largely due to the wind-down of the government stimulus package. However, much of this caution seems to have dissipated over the past quarter.

“The return in confidence in the majority of key indices such as sales, profits and employment and an improvement in long-term indicators, such as capital investment and inventory, demonstrates that businesses believe that this improvement will not just be short term. However, executives and policymakers must be alert to the signals on capacity constraints.”

Nineteen per cent of executives report having significantly less access to credit in the last quarter and 8% slightly less access. Only 18% report much greater or moderately better access to credit. Half (50%) report no change in their access to credit.

Rising business-to-business payment days had a negative impact on 43% of firms, a rise of 8% in two months. Dun & Bradstreet's Trade Payment Analysis reveals that a deterioration in payment terms (2.1 days) in the December 2009 quarter took terms up to 53.9 days. If past history is repeated, payments terms may rise again in the March quarter, placing further pressure on the cashflow of Australian businesses.

Thirty-nine per cent of firms rank wages growth as the major influence on their business and 31% consider interest rates as their primary concern. Only 17% believe fuel prices will be the primary influence on operations in the quarter ahead.

With the rising improvement in profits expectations, 26% of executives plan to reduce their current business debt levels in the next three months, 11% significantly and 15% moderately, while 17% expect to increase it and 50% plan to maintain current levels.

Dun & Bradstreet's economic consultant, Dr Duncan Ironmonger, says the latest survey shows Australian business executives maintain strong expectations for their firm’s business performance in 2010: “Capital investment expectations are at their highest levels in seven years and sales growth expectations the highest in six years. These are boosting profits expectations, so executives have raised their intentions to make strong increases in staff numbers, capital investment and inventories.

“However, the latest ABS retail sales and building approvals statistics (February 2010) show negative movements in seasonally adjusted terms, which must cause some concern. Moreover, interest rates are expected to rise in the next few quarters as the Reserve Bank moves monetary policy to a more neutral position. Consequently, access to credit on favourable terms could be a restraint on business executives achieving their buoyant expectations for the short-to-medium term.”