Business employment and investment plans take a hit from tough trading conditions

Tough trading conditions are continuing to undermine the willingness of businesses to invest and employ people, as new research shows sales and profits declined in the March quarter.

Businesses assessment of their trading conditions slipped into the negative, dropping from 50.6 to 49.0 on the Australian Chamber of Commerce and Industry’s investor confidence survey.

The Own Sales index also indicated a poor start to 2014, with it failing to break out of negative territory.

ACCI acting chief economist Burchell Wilson said in a statement the deteriorating conditions are “concerning”.

“In particular, the downturn in expected investment challenges official forecasts that an upswing in non-mining investment will sustain growth in the year ahead,” he said.

“Similarly, the pronounced slump in the index of expected full-time employment shows businesses are looking to consolidate their operations and have a strong focus on cost savings. With expected capacity relative to demand running at elevated levels while sales and profits continue to disappoint, there doesn’t appear to be a strong business case for expansion.”

The index of expected full-time employees fell markedly. ACCI says the sharp decline of 1.7 points from 45.1 to 43.4 in the past three months “erased the significant improvements that took place in 2013”.

This index has remained in negative territory since June 2010.

Ever fewer businesses are intending to re-invest in their business in the next three months, as the expected level of investment index slipped from 43.1 to 42.1.

Of the respondents, 48.1% said the investment in their business would be somewhat lower to much lower, while only 18.8% intended to invest more in their company.

Wilson said because of the negative indicators, it’s too early to rule out the need for further rate cuts by the Reserve Bank.

“At the very least, fragile business confidence and a rising unemployment rate argue for interest rates to remain stable for an extended period,” he said.

“The current economic cycle is unprecedented and policy missteps predicated on forecasting error in the near term are a heightened risk. The business community believes that a cautious approach to monetary policy remains warranted.”

But despite respondents’ general negativity toward their own businesses, national economic conditions are still tipped to improve in the next three months.

The expected national economic conditions index reached its highest level since March 2010, with a reading of 54.7, up from 54.0 in the previous quarter.

Wilson says businesses remain optimistic that activity will improve across some indicators.

“This is one of the few positive elements of the survey but even here positive expectations are moderating and the extent to which reasonably buoyant expectations have disconnected from poor actual trading conditions suggests business confidence remains at risk of a downward correction in coming quarters,” he said.

“Actual sales and profits are falling very far short of the expectations businesses had six months ago, that is unlikely to be sustained without firms seriously re-assessing their expectations for their operating environment.”