A banker’s warning

It’s profit reporting season for Australia’s banks at present, and the mood is one of caution. With consumer spending weak and house prices falling, the banks are hoping to see business lending improve.

It hasn’t happened yet and according to ANZ Banking chief Mike Smith, growth is likely to be slower compared to the bull market conditions the banks got used to.

Smith is well placed to get a top-down view of Australian industry and yesterday he delivered an important warning for entrepreneurs about the outlook for the Australian economy.

Like most commentators, Smith sees the economy as patchy.

“Parts of the Australian economy have clearly hit a flat spot, with consumers and businesses being more conservative now, after the financial crisis. They are more reluctant to spend in an uncertain economy.”

But more important was his statement about what he believes is a “twice-in-a-century” structural change in the economy.

“The bigger picture is that we are starting to see the effects of a major structural change that’s under way as the economy continues the shift towards being much more based around hard and soft commodities,” he said yesterday.

“I don’t think the magnitude of this shift is fully understood, nor are the implications for industries such as manufacturing, tourism and retail, where business models are clearly going to have to adapt to a lower-margin, lower-growth environment.”

Low margins, low growth. That’s not what entrepreneurs hoping that the economy would simply spring back to the way it was prior to the GFC – where credit was easy, debt wasn’t a worry and consumers couldn’t stop spending – want to hear.

Smith’s message is clear: Those days aren’t coming back.

Smith is really underlying what the PwC Private Business Barometer said earlier this week about the squeeze hitting entrepreneurs.

Australian companies produced relatively good profits during the downturn by slashing costs.

But that lever has been pulled now, and the only way to grow profit is by growing revenue.

However, this is proving difficult in the current environment – indeed, most businesses are being forced to discount, putting further pressure on margins.

Let’s be clear here – there will always be opportunities for smart, emerging businesses to deliver very fast growth, particularly in sectors such as technology and services.

But what Mike Smith is saying is that we are not in the middle of a low-growth GFC hangover period – this is what the economy now looks like.

Is he right? As much as we all hope Smith is wrong, the evidence is mounting that a major change is underway.