The Commonwealth Bank’s director of equity strategy Tim Rocks said “about half the listed companies that we cover are in the middle of aggressive cost-cutting campaigns” earlier this week.
It’s a result of life being a little bit too easy for corporate Australia in the run up to the GFC and during the mining boom according to Tim Baker and Joseph Kim from Deutsche Bank, who issued a report on the efficiency drive from corporate Australia this morning.
The duo highlight that Australia’s big businesses have grown relatively inefficient and are now carrying too many costs and too many staff when compared to US corporations and other global competitors.
So as Australia’s economy slows and the tide rolls out, hard decisions need to be made if corporations are going to keep shareholders happy and grow the top bottom line even if top-line revenue is lagging.
It leads to cost cutting in place of sales growth and it is a theme that has played out in businesses across the United States for some years now, and it is theme picked up on by this morning who reinforced Rocks comments on corporate cost cutting.
While the Deutsche Bank report was aimed at optimistically forecasting that Australia’s listed companies have series layers of fat to cut which, in the end, is supportive of share prices and profitability even if sales revenue is disappoints. The unmistakable message from the authors is that it is workers who are going to bear the brunt of the efficiency drive.
Indeed finance geeks already have a new term for cutting workers and costs -‘cost out’. As in cutting costs out of the business, like a cancer.
Baker and Kim wrote that “Australia benefited from strong top-line growth (but) labour productivity growth was weak” during the last boom. Which means that while US companies, hit harder by the GFC-induced economic downturn, have been cutting cost aggressively for years now, “with less of an earnings decline, Australia companies may have felt less pressure to drive efficiencies than US companies”.
But with Australian “macro conditions” no longer accelerating “a wide range of companies have embarked on efficiency programs” – exactly what CommBank’s Rocks said earlier.
That’s not good news for employees, given that firms finding ways to “operate more efficiently often means less employment” HSBC Chief Economist Paul Bloxham told Business Insider.
“This cost cutting drive has been underway for a year or two now, and is part of the reason why the unemployment rate has climbed from around 5% to around 6%,” he said.
The good news though, Bloxham says, is that the economic transition is happening “as growth is re-balancing from being led by the mining sector towards other industries,” which means that HSBC believes “the unemployment rate is close to its peak”.
Let’s hope he is right, because as Australian businesses hunkers down to ride out the economic transition it’s not sales which is the target, but employees and associated costs.