Business confidence and conditions fall again, but executives hope for better end to the year

Australian businesses are continuing to feel the effects of an economic recovery running out of steam, with NAB’s monthly business survey revealing further falls in business confidence and conditions.

However, there is a bit of light at the tunnel. A separate survey of business expectations by credit agency Dun & Bradstreet revealed executives are generally positive about the December quarter, while strong employment intentions suggest most firms feel they can weather the short-term pain and hit the ground running as the recovery gathers momentum.

NAB’s monthly business survey showed business confidence fell for the fifth consecutive month, with confidence particularly hard hit in the manufacturing, retail and construction sectors.

Those sectors also reported sharp falls in actual business conditions, with weak sales and profit results weighing on firms across the economy. The NAB survey also showed sharp falls in new orders and capacity utilisation, indicating the third quarter will remain rather rocky for many entrepreneurs.

D&B’s business expectations survey reported similarly mixed trading conditions. While 28% of firms increase sales in the June quarter, 24% saw sales fall; while 14% hired, 10% reduced staff; and while 19% of firms saw profits increase, 18% experienced a drop in profit.

However, the survey suggests the outlook for the remaining year is strong. For the December quarter, an impressive 41% of firms expect sales to increase (against 16% tipping a sales fall) while 28% expect profits to rise (versus 11% expecting a fall).

Against this positive outlook, employment expectations remain muted and selling prices expectations are also lower, indicating firms are gearing up for a prolonged battle with those frugal consumers.

While Dun & Bradstreet chief Christine Christian, says conditions remain weak – six key indicators of business conditions fell during the June quarter, with sales taking the biggest dive – the turnaround in confidence for the rest of the year is a good sign.

“The number of firms expecting to increase sales and profits is strong, which bodes well for the nation’s economic growth in the coming months. However, Australian firms remain cautious on employment and capital investment.”

NAB chief economist Alan Oster says the construction sector, which is typically an important measure of economic demand, needs to be watched carefully.

“While care always needs to be used in interpreting monthly data, it is clear something important is happening here,” he wrote in the report.

“The most likely explanation revolves around the passing of the peak in government construction spending, as well as a weaker housing construction market. As with the broader survey, the falls in construction were concentrated in profitability (especially) and trading – while employment edged higher. That suggests the falls were largely unexpected or viewed as temporary.”

Similarly, the retail sector is also likely to be a key industry to watch.

While both surveys show poor conditions and sagging confidence continue to dog the sector, Dun & Bradstreet did note that retailers appear to be trying to dig themselves out of the savage discounting cycle that is smashing margins in the sector.

While earlier surveys had shown a significant portion of retailers planned to reduce prices in an effort to turn over their stock, the latest survey suggests only 2% plan to drop prices in the December quarter to boost sales.

The NAB survey also showed a rebound in the strength of mining sector confidence following the Government’s mining tax deal.