No Surprise on Business Expectations | BTalk Australia

(10min 11) Dun and Bradstreet has just released it’s latest Business Expectations Survey, showing 58% of business expect profits to fall in the March quarter. The report comes out a day after ANZ revealed the biggest two-month drop in job advertisements in 30 years.

So is it all bad news? On today’s BTalk Australia Phil Dobbie asks Christine Christian, Dun and Bradstreet’s CEO, if there is any glimmer of hope from today’s results? Could we be talking ourselves into a recession?

What do you think? Add comments in the Talkback section at the end of this post.

View all BTalk Australia podcasts here

Subscribe to BTalk Australia on iTunes.

• Today’s Transcript

Phil Dobbie: Hello, I’m Phil Dobbie and welcome to BTalk Australia. Today: more news on the economy, is it good or bad? There’s a lot of doom and gloom around the economy right now. The only solace we seem to have is the fact that Australia doesn’t seem to have it as bad as everywhere else. So is there light at the end of the tunnel? Dun and Bradstreet have just released their latest National Business Expectation Survey, which is looking ahead to the March, 2009 quarter. Christine Christian is Dun and Bradstreet’s CEO. Christine, is there any good news we can take out of this latest survey?

Christine Christian: There is some good news. The latest government handout certainly will stimulate the economy, at least until Christmas and possibly just after Christmas. So we will see some renewed spending and we certainly need that right now. But Australia has not escaped the financial market turmoil that’s driving deteriorating conditions around the globe. The credit crisis for Australia is really in the area of accessing funds — Australian businesses are finding it very difficult to access funds. And that’s really the area that is of concern, as is the fall in commodity prices. It’s caused the Australian dollar to fall markedly and it’s causing businesses to pay more for their imports.

Dobbie: But, conversely, obviously it’s very good for anybody who’s exporting. I mean we were, it was only four months ago, they were looking at parity with the dollar — it’s been a significant drop, hasn’t it?

Christian: Oh, it has. This really is good news for the exporters, there is no doubt about that.

Dobbie: As long as they are exporting to countries that are actually still buying, I guess that’s the converse, isn’t it?

Christian: That’s exactly right. And you know, despite the forecasted declines that are coming out of countries like China, we’re still holding up pretty well, relative to the rest of the world. The other good news for Australia is that our banking industry, unlike many of the other developed countries around the world, is still pretty solid and that’s as a result of Australia not getting to involved or seduced by the whole sub-prime market.

Dobbie: That’s the good news. I guess that bad news that the latest survey shows is there’s an expected drop in sales for next quarter. There was an expected drop in sales last quarter as well. In fact, when did this drop really start to occur in your surveys and what sort of magnitude of drop in expectation have we been seeing?

Christian: It’s been a significant drop. The March quarter is expected to bring a further decline in sales and the other areas that will be significantly impacted is profits, employment growth and capital investment. All of these indexes have been in negative territory for three consecutive quarters. So most of — well, at least more than half of executives expect a slowdown in sales and 58 percent expect a decline in profits.

Dobbie: They’ve been saying that for a couple of quarters and we have seen a slowdown in the economy. The economy is still growing, albeit marginally, so are people being more pessimistic in these expectation surveys than reality? I mean, are we talking things down, in other words?

Christian: I think what’s happening is that most businesses are seeing it as they’re experiencing it. I don’t really subscribe to the theory of this nation talking down the economy. There are a number of areas in industries that are doing it particularly hard. The construction industry is really going through a pretty rough patch at the moment. And, not being able to access funds is really probably the one key area that we just don’t see any sort of positive sign on the horizon.

Dobbie: And that can impact all manner of businesses, even businesses that might cyclically make a call for short-term credit to manage cash flow. I think some of those businesses are struggling, aren’t they, because that cash that might have been easy to get at one time is more difficult to access now.

Christian: They’re having difficulty accessing funds and funding costs are high at the moment. This is the area that’s been eroding profit margins of Australian businesses for months now. And as a result, we’ve seen business confidence fall away dramatically and expectations for the coming quarter have hit lows really not seen since the 1990s. You know, the fall in commodity prices is also making many business owners feeling nervous about the prospects for next year. And so, our view is that the economic conditions will remain challenging for some time. However, you know, we do expect that Australian business will weather the current turbulence probably better than most other developed nations.

Dobbie: Now, we’ve seen, since the middle of the year, an expectation from business that they’re going to have to lift prices. We saw a pretty significant drop in inflation with the inflation rate in November. What’s the latest expectation survey telling us about where prices are going? Do you think they are under control?

Christian: Selling price expectations have risen by 34 percent over the past nine months to reach the highest level ever recorded by the D and B survey. So 82 percent of businesses indicate that they will have to raise prices in the new year, and what they’re not sure about is whether the consumers will accept those price increases. That’s really the big bet that they’re currently placing. What we don’t want now is a consumer backlash to increasing prices. But, quite frankly, for many businesses, they really don’t have a choice.

Dobbie: They’re pushing up the prices to cover them.

Christian: Cover their increase in costs.

Dobbie: Yeah, that’s right. Often unemployment is the last indicator to show that you’re really heading for a downturn. What’s the survey telling us? Are businesses expecting to lay off more people in the next quarter?

Christian: I think there’s no doubt that businesses are looking to lay off more people. That is an area that no one can really quantify, I think we’ve already seen the banking sector make some fairly hard decisions of late and it looks like they’re implementing as we speak. Small business is doing it particularly hard. It’s really the rest of the general economy. One thing we do know is that there’re going to be very few new jobs created over the ensuing year. But how many more job cuts is going to be very much dependent on whether businesses in Australia can maintain their profit margins.

Dobbie: This is a crucial time of year, of course, Christmas is just around the corner. Many businesses are going to be hoping for an injection of cash from shoppers. But that has the other affect of increasing debt. Do you think Aussie shoppers actually have the spending power or are they so heavily steeped in debt that we’re unlikely to see that turn into a bonza spending spree this Christmas?

Christian: It’s a difficult time. It’s a difficult question. Firstly, our unemployment rate is still relatively okay compared to the other developed countries. So we’ve still got pretty healthy employment which means our wages are still coming in, which means that it’s most likely that we will see spending probably improve over the next couple of weeks. But retailers are very concerned that the average dollar spent per consumer is coming down and they really don’t see that improving much into the next quarter. So, our view is that retailers are, without doubt, bracing themselves right now and are really not sure what March is going to look like. That’s when we will see the decline substantiated in real statistics.

Dobbie: I see that Jerry Harvey has said that the current environment is probably the worst for 50 years in terms of margin pressure for retailers. So they could certainly got to be feeling it.

Christian: Oh yes, the large retailers are doing it pretty hard at the moment.

Dobbie: Well, it’s interesting times we find ourselves in. I’m glad you’re saying that we’re not talking down the economy. Things really are pretty bad because the media are the ones who keep on getting accused, of course, of talking down the economy. Now you’ve got a survey which is looking over into the next quarter, things could be spiraling downwards it appears, Christine. Thanks so much for your time today.

Christian: Oh, you’re very welcome. Thanks Phil, bye.