Business confidence grows but sales and profit outlook still a worry

Business confidence and conditions are improving but businesses are still concerned over expectations for profits, sales and employment in the battered sectors of retail and construction, according to new surveys from NAB and Dun & Bradstreet.

But the results also show that activity in the mining sector is continuing to boost overall sentiment, with NAB economist Rob Brooker saying confidence in some areas is helping some other sectors.

“Although the survey does show some aspects are running a little below trend, things have been improving and I think confidence in certain industries… such as the resources sector… is performing well.”

The NAB survey found business confidence increased by 10 points to 14, with business conditions also rising from negative six to negative two, with trading also up from negative seven to negative three. The index of profitability rose from negative 10 to negative five.

The index of employment only gained one point to one, with forward orders also rising by only one point to negative four.

Much of the improvement has been caused by a significant upturn in activity in Queensland, where businesses are recovering well despite suffering after-effects from the recent natural disasters. The survey shows it is no longer the worst state – business conditions fell to -20 points in South Australia.

But while conditions may have significantly improved since January and February, there are more troubling situations afoot. The current political turmoil in Libya has caused petrol prices to skyrocket.

“You’re seeing a degree of sentiment that may have more of a long-term effect. We are of course a lot less oil dependent than we used to be, but oil prices do feed into other areas, such as transport, retail, and so on.”

Petrol is now at a 29-month high as production drops in the Middle-East. CommSec economist Craig James said yesterday the impact of higher prices means already frugal customers will stop spending.

“Filling up the car with petrol is the single biggest outlay that Aussie households make each week so changes in petrol prices have a big impact on the budget and spending patterns. The average household is paying almost an additional $30 a month more on petrol compared with just over six months ago.”

However, Brooker says businesses only need to worry if the situation appears to worsen over time.

“I think this situation depends to the extent higher prices are sustained. If this is temporary, you won’t see much of an impact at all I don’t believe.”

The NAB survey shows the transport, recreation and finance industries recorded the largest increases in conditions, while the wholesale, manufacturing and construction industries still recorded weak data.

“Retail and wholesale are still taking a big hit. Consumers are pretty cautious, and the floods haven’t helped. Yes, there are industries that are doing well, but rain and weather made things harder.”

“Business confidence is actually quite good, but the actual conditions aren’t.”

The NAB survey also comes alongside new results from Dun & Bradstreet, which found in its monthly survey that sales, profits and employment expectations are all down.

The sales expectations index dropped 14 points to 17, with profits expectations also down 17 points to 13. Employment expectations are down four points to five, while inventories are down five points to five.

The survey also found 29% of executives believe interest rates are the primary influence on their business, a rise of 2% from last month. While 23% of executives also believe wages growth will be the biggest influence.

D&B said in a statement that sales expectations are now at their lowest level in two years, and that these expectations are weakest in the retail and manufacturing sectors.

Executive expectations for capital investment is also falling due to poor outlooks on sales, with the capital expenditure index falling six points to seven – down from the previous four quarters. Inventory expectations are also down by five points.

D&B chief executive Christine Christian says retailers are seeing that discounting isn’t working, and are now adjusting expectations for more frugal times.

“Retailers now appear to be accepting the permanency of this trend and have adjusted their expectations for the June quarter accordingly. As a result manufacturers and wholesalers have also lowered their expectations and the consumer effect washes through the supply chain.”

The survey of employment expectations has also fallen to its lowest level in five quarters. Duncan Ironmonger, Dun & Bradstreet’s economic consultant, says the threat of rising wages will keep employment growth subdued.

“Although Australia’s resources sector continues a strong expansion, the cautious consumer spending of households is restraining growth in the retail, wholesale and manufacturing sectors,” he said.