Pessimistic CEOs | BTalk Australia

(11min 58) We can’t kid ourselves in Australia, the economic downturn is starting to hit us hard. But how hard? The Australian Industry Group (AIG) and Deloitte recently published the “National CEO Survey — Business Prospects in 2009″. It’s a report on a survey of 480 CEOs and their expectations for business in 2009.

Today on BTalk Australia Phil Dobbie talks to Tony Pensabene, AIG’s Associate Director for Economics and Research, about the findings and the implications for government policy.

Do you agree with the findings? What should the government do next? Add your comments in the Talkback section at the end of this post.

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• Today’s Transcript

Phil Dobbie: Hello, I’m Phil Dobbie and welcome to BTalk Australia. Wayne Swan is creating a budget deficit, corporate Australia keeps hitting us with massive write downs and rate cuts on profit forecasts, and few if anyone would say that Australia is going to keep out of recession. So how bad is it going to get? Today, what do the CEOs say?

This might not be a total surprise. CEOs reckon that this is going to be one of the toughest years in decades. The Australian Industry Group and Deloitte have surveyed 480 CEOs in the manufacturing, construction and service sectors, running companies that account for about 31 billion dollars in revenue and 84,000 employees. The opinion of these CEOs is that we’re now starting to suffer a significant downturn. Tony Pensabene is the associate director for Economics and Research at the Australian Industry Group. Now Tony, we’re all a bit more positive going into Christmas. We had that cash injection from the government and the resources sector is holding up. We were telling ourselves that we weren’t going to have it as bad as the rest of the world. Do you think that view’s changed coming into 2009?

Tony Pensabene: Look I think yeah, one positive we can take out of all this is that it probably is correct that Australia won’t experience the severe downturns of almost major recessionary conditions that other countries are going through right now such as US, UK, Spain and a range of other countries around the world. But nevertheless, we can’t avoid the consequences of a slowdown in China and the rest of the world and the way which consumers now are much more cautious about their spending. So it’s clear that Australia is going to experience a significant slowdown. Whether we will get to experience a recession I think is still some debate, but we’re certainly going to have that major slowdown.

Dobbie: Well I mean this is bad news, isn’t it? What are the lead indicators from this research? What are the CEOs telling us of their intentions for this year?

Pensabene: Well look, I think the story isn’t very positive. It’s certainly I think worrying and troubling times for companies in the manufacturing sector, the sector expects their sales to fall this year round about 4 and a half percent. In the construction sector, they’re expecting sales declines of around about 5.6 percent and services will continue to grow, growth running around about 4.7 percent. But that’s well down on the sales growth they had a year ago or two years ago running around 11-12 percent. So we’re going to see a major slowdown in activity across manufacturing, construction and services and with that comes consequences in terms of jobs and investment, R&D, and/or other discretionary spending.

Dobbie: Now I suppose this adds fuel to the debate that the government’s cash injection prior to Christmas hasn’t really done a lot to help.

Pensabene: Look I think it’s a bit premature to make that call. There is some preliminary data that would suggest that there may have been some impacts in the retail and possibly in the housing side with the loans going at low interest rates. But I just think what we’re seeing is at the moment in terms of December and January and the early part of this year is the consequences of the major slowdown that’s been experienced in the second half of last year. And that reactions in terms of the global environment. So the conditions are looking bad and they look like they are deteriorating, but I think we will have to wait a month or two before we can really judge how the government’s assistance packages have assisted the economy.

Dobbie: Now there is a danger isn’t there of a self-fulfilling prophecy as companies are talking about cutbacks. I mean they’re not talking about growth. So will we see the economy start to shrink because of that? I mean could we be talking ourselves into a recession in other words?

Pensabene: There is always a danger that bad news breeds people being much more cautious and behaving in such a way. But I think that this is a reality for many companies. They know that the amount of their products has shrunk and clearly you know they’ve broken and stuff in tough times. I don’t think anyone would want to go through this environment, but it’s a reality facing Australia and the rest of the world. And the only issue is to how to beat the downturn. As I said, we’re hopeful that Australia won’t experience the very substantial downturns that other countries around the world are going through right now.

Dobbie: But a lot of this research seems to indicate that the results of expectations of reduced income is that a lot of businesses are saying, right, let’s make cuts in investment, in equipment, in research, in training, which seems a fairly short-term view. I mean that it might get you over a short term hump, but it’s not looking good for next year.

Pensabene: Look that’s certainly correct in the sense that you know what we would rather see is companies try to use the current environment and find opportunities and look for ways to grow. But in an environment where companies are finding their cash flow tightened and orders aren’t coming in the way they used it, I think they really haven’t got much option other than to look for areas to trim costs and to contain costs. It really is a survival strategy to get through to the next phase of growth in the economy and I think it’s not unreasonable to expect companies to look for ways in which they can maintain their operations and be ready to reinvigorate growth in 2010. But there are consequences in terms of jobs and investment and a whole range of discretionary spending.

Dobbie: Now we’re told as well that inflation is not a big concern anymore. The CPI actually fell in the December quarter. Yet this research is also pointing to the fact that manufacturers are having to push prices up. So does that mean that there’s a risk that we could see inflation start to rise again, pushed up by increased manufacturing costs?

Pensabene: Look I think the reality is that inflation environment will continue to moderate. I mean when you experience significant slowdown in demand that does take pressure off profits and wages. But nevertheless I think there will be some adjustments by manufacturers to try to stabilize their income. But I don’t think it is going to lead to a break of inflation. I think the general inflation environment in next year is for lower inflation.

Dobbie: Now out of the sectors you’ve looked at, the construction sector and I guess the manufacturing sector as well has the most pessimistic outlook for the year ahead. To what extent do you think this is driven by a lack of available finance? And how much of it is driven by a lack of demand?

Pensabene: I think it’s first and foremost a demand story. With world demand for our exports slowing, with consumers being much more careful, with the housing market demand slowing from that being tight, it is largely a demand story for the manufacturing and construction sector and also for services. There are some implications in terms of credit costs and credit availability for large projects and for large companies particularly in the construction sector. But what we’re finding is a lot of companies are telling us with demand down, they don’t really need to borrow at this point in time.

Dobbie: So does it make sense, Kevin Rudd’s four billion dollar bail out for large construction projects if, do we need more office space for example if you know if a lot of businesses are downsizing? As you say, the demand is not there, so does the government really need to pump money into to help projects that might not be needed after all?

Pensabene: Look I think the answer is yes. That it certainly was needed, the construction sector and the commercial construction sector I think do run on a fair degree of borrowing and you know credit obligations, its big projects moving. So I think there is clearly a strong case to keep the commercial and construction sector moving and to insure that you know they do have adequate funds. And it’s pretty clear as we’ve seen in other countries; the credit availability for construction activity tightens that has a very severe impact on activity. And the construction sector does have slower implications both to manufacturing and to other parts of the economy. So I think in the case of the construction sector, it was a wise move by government to shore up credit availability.

Dobbie: Now the services sector is slightly more buoyant and certainly more optimistic, they’re forecasting an almost 5 percent rise in sales. Now given manufacturing and construction are forecasting they are going to be so down and we’re expecting unemployment to rise in almost every sector, and we’re expecting less demand for resources, do you think possibly the service sector is actually being too bullish? Is there going to be enough money in people’s pockets for people to actually buy more from the services sector?

Pensabene: Well look as I indicated, services sector demand is been growing around 10-11 percent for the last few years. And so the decline by almost half I think reflects I think their view that conditions are much tighter and demand is going to be harder to sustain. But you know I think this is a positive sign because if services sector activity actually collapsed to be negative, then we would have a very serious problem in the Australian economy. So you know it is a significant slowdown in the service sector. If consistent to what we’re seeing in other slowdown periods for the service sector and probably provides I think a bit of a buffer from the economy going into a very bad recession.

Dobbie: So what do you think is the most sensible way going forward now for the government, given the findings of this survey and the other indicators we’re seeing? Tax cuts I would have thought would have too much of a time lag to create real benefits except for perhaps company tax. Should they be looking at trying to reduce the cost of doing business?

Pensabene: Look I think certainly there is scope to bring forward some of the tax cuts that were announced last year, so they can come forward and that will have a more positive impact. There is scope to assist companies in terms of countering these negative affects in terms of spend on R&D and investment. So its improved capital allowance, improved recession arrangements could all be helpful. And there will probably be some scope to do something about some tax offsets for companies that again experience a loss in the next 12 months or so. But rather than claiming them against future profits, they can claim them against their current activity.

Dobbie: So bringing it all forward in other words.

Pensabene: That’s right.

Dobbie: Of course, a downturn is for many an opportunity for others. Were there many CEOs who were surveyed who took a positive view of the year ahead and actually said hey, we could actually grow our share in this market?

Pensabene: Look there are some positives, I mean companies clearly see the lower cost environment, lower cost for fuel, all of that as being a bit of a benefit in terms of getting costs off their operations. But there are really a very small number of companies who would say that this environment is the ideal environment. I think everyone wants to see growth, everyone wants to see consumers being confident about their future. And I think really they’re very marginal, those companies that see some benefits at this point of time.

Dobbie: And can we get an indication of how long CEOs think these economic conditions are going to continue for?

Pensabene: We only covered 2009 but our forecast, I think the broad market forecasters, are suggesting that some time around about mid 2010, hopefully we’ll start to see the economy start to turn around.

Dobbie: OK. Well listen I guess one of the advantages of you in an economic downturn, you might as well be in an economic downturn in Australia because at least the sun still shines.

Pensabene: That’s right.

Dobbie: That’s one benefit. Thanks so much for your insights today. It’s been very useful.

Pensabene: Pleasure.

Dobbie: Thank you Tony.

Pensabene: Bye.