What the bear market means for your business

A persistent bear market in Australia is unlikely to have catastrophic consequences for Australian SMEs, but business owners should keep a “weather eye” to changing market conditions, leading economists say.

Australian sharemarkets yesterday tumbled into bear market territory after falling close to 25% down from its most recent high on 1 November last year.

And while a rebound today could see Australian markets lose their bear status, ongoing uncertainty about just how much damage caused the international financial crisis will wreak means further market falls in the short term are likely.

For those who own and run businesses not listed on the stock exchange, however, the effects of ongoing market weakness only becomes a problem when its stops customers buying.

Most economists are predicting strong growth to continue in the Australian economy in 2008, albeit at slightly lower levels than in previous years.

Tony Pensabene, chief economist with the Australian Industry Group, says there are three ways the international squeeze could threaten that growth – by crunching consumer confidence, squeezing business investment, or putting a dent in the economic growth in China and India.

Pensabene argues most businesses have already locked in investment decisions for the short to medium term, and says the strength of economies like China and India is likely to remain impressive even given the effects of a possible US recession.

That leaves consumer sentiment – the factor that Pensabene sees as the biggest influence on growth levels and the biggest unknown.

“The key connection is what current events do to the confidence of Australian consumers, and we just don’t know the answer to that,” Pensabene says.

VECCI economist Steven Wojtkiw agrees, and says if we see a combination of higher interest rates and damaged consumer confidence sectors business in the retail and tourism sectors could take a hit.

“We’re already starting to see some nervousness in our business survey in the December quarter. Our members do see the outlook as being softer than the past year, while still positive, and that partly reflects uncertainty about equity markets and the prospect of higher rates in the near term,” Wojtkiw says.

For business owners, the lesson may to continue to make the most of the current economic strength while positioning their business to respond to a downturn in growth.

NAB head of Australian and industry economics Jeff Oughton says while the outlook remains largely positive, businesses can’t ignore the possibility of a downturn.

“The best advice a macro-economist can give to small businesses is get on with it but keep a weather eye on turbulence. If markets stay down that eventually will have significant effects on the economy and it will only make things worse if businesses remained positioned for good times if things turns bad,” Oughton says.