Australian businesses upbeat on sales & profits

According to illion’s latest Business Expectations Survey, Australian business conditions are buoyant amid strong performances in sales, profits and employment, with the Business Expectations index hitting 23.7 points in March, up 16.4% on the same period last year and the highest level since 2015.

Expectations for employment jumped 54% on the prior year to 17.8 points, with Transport, Communications & Utilities businesses most likely to hire during Q2 2018.

Selling prices and profits expectations are up 43% and 22% respectively. Actual profits for Q4 2017 rose 79% on the prior corresponding period, while the actual employment index surged 74% to an 18-year high and actual sales rose 36% to its highest level since 2004.

“Businesses have maintained a favourable outlook for the economy,” said Stephen Koukoulas, illion Economic Adviser. “The upbeat business mood fits with a range of other indicators pointing to buoyant conditions for the economy.

“The recent GDP result confirmed economic expansion of 2.4% through 2017, a pace broadly consistent with the business expectations index. At its current level, the index is pointing to a step up in growth in the first half of 2018.

“Expected sales maintain a positive outlook for Q2, which points to a pickup in economic activity in the first half of 2018. Low interest rates and a stronger global economy are factors helping to support the sales outlook.

“That said, employment expectations have edged lower, but remain at an overall buoyant level. A critical question for the economy and RBA interest rate policy is the strength of the labour market. If this turning point in employment expectations deteriorates in the months ahead, there will be further doubt about the prospects for interest rate rises within the next 12 months.

“It is particularly interesting that expected selling prices have increased sharply since the end of 2017. To date, the official inflation data show price pressures are well contained. The inflation risk evident in the survey will be a closely watched aspect of the economy over coming quarters as it too will influence the RBA monetary policy considerations.”

Capital Investment plans increase

Businesses are expecting to increase capital expenditure in Q2, with the index up 8.6% on Q1. Expectations for capital increased for the third consecutive quarter to 13.0 points, although this was on-par with the 13.3 points recorded for the same period last year. The rise comes amid growing support from businesses for the federal government’s plan to cut the corporate tax rate from 30% to 25%. The standout sectors are Retail and Services, with their respective capital investment indices doubling from Q1. These sectors are also the most optimistic about growing their businesses in 2018. Around 76% of Retailers and 72% of Services firms said they are more optimistic, compared to the ‘all-firms’ average of 69%.

“In line with the recent data on business investment, firms are expecting to increase their capital expenditure over the next two quarters,” added Koukoulas. “The expected pickup is relatively moderate and it follows five years where business investment had been weak. A pickup in business investment is one of the key themes for the government as it frames the budget, to be handed down in May.”

Operating costs and skilled labour top list of major obstacles

Factors cited by the business sector as the major obstacles for expansion are rising utility and operating costs and a shortage of skilled labour. The growing scarcity of skilled labour is at odds with the official labour force data, which shows unemployment at 5.6%, little changed in recent years, and a high under-employment rate.