Australian business conditions are the best they've ever been -- but that may now be over

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  • The business sector has been one of the few shining lights for the Australian economy in recent years.
  • A new survey of executives suggests the top of the current business cycle may already be in with expectations for sales and profits weakening ahead of the September quarter.
  • Fallout from the Banking Royal Commission, along with skill shortages, are two factors that could negatively impact business in the period ahead.

The business sector has been one of the few shining lights for the Australian economy in recent years.

With both interest rates and the Australian dollar lower than in previous years, it’s allowed business to flourish at a time when the household sector has been weak.

Non-mining investment is starting to pick up, employment growth has surged and operating conditions are the best they’ve ever been, at least in the past 30 years, according to the National Australia Bank’s highly-respected monthly business survey.

It’s all looking peachy for business right now.

However, there are signs emerging that the upswing may now be over.

According to illion’s preliminary Australian Business Expectations Survey, capturing the opinions of business executives, expectations for sales and profits weakened noticeably for the September quarter, falling 11.5% and 4% respectively from the levels reported three months earlier.

Along with lower expectations for selling prices, the deterioration managed to offset improved sentiment towards the outlook for employment and capital investment which both climbed to multi-year highs, leaving the report’s headline expectations index at 23.5 points, just off the three-year high of 23.6 in the prior survey.

To Stephen Koukoulas, illion Economic Adviser, this suggests the best of the business cycle may now be over.

“The business outlook is presenting a broadly positive background, but with some areas of softness emerging,” he said following the release of the September quarter report,” he said.

“The illion survey fits with the broader news on the economy, which shows moderate economic growth, well contained inflation and stalling profit growth.

“It is too early to say there is a weakening trend, but another few months of weakness would be disconcerting.”

Source: illion

Helping to explain the slide in sales expectations, respondents indicated that actual sales over the March quarter slid 26.4% to 19.7 points, dragged lower by weakness in actual sales in the retail sector which slumped 77.8% from the previous quarter.

However, reflecting the improvement seen in operating conditions over the past year, actual sales were still well above the levels seen in same period in 2017.

“The turning point in expected sales will need to be closely watched in the coming months,” Koukoulas says.

“Its correlation with underlying economic growth in the economy has been well established over the long run. This means that any further fall in sales expectations will be a warning sign that the economy could be slowing.”

Source: illion

However, while expectations for sales and profits weakened, that was not enough to sour sentiment towards hiring and capital investment which continued to improve.

“Planned capital expenditure is at its highest level since 2010,” Koukoulas says, adding that “firms are clearly keen to expand their capacity on the expectation of stronger activity in future”.

He also noted that expectations for employment hit an 18-year high, suggesting “some upside to the next few months of official employment data”.

As for the biggest concerns for business over the longer-term, Simon Bligh, CEO of illion, said policy uncertainty stemming from the Banking Royal Commission may present a challenge.

“The banking royal commission could have far-reaching consequences for the Australian economy,” he says.

“We may see a tightening in the availability of credit for both business and consumers as financial institutions reassess their lending processes.

“This could have flow-on effects for investment planning, demand for goods and services, employment and, most significantly, the housing market.”

Nearer-term, 23% of respondents indicated that a shortage of skilled labour was their biggest barrier to growth over 2018.

In the latest survey, illion, formerly known as Dunn & Bradstreet, interviewed approximately 407 executives during April.

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