Promising signs for an easing of inflationary pressure

The latest Dun & Bradstreet Business Expectations Survey is showing early signs of success in the fight against inflation, with a five point decrease in selling prices expectations since the previous survey.

The survey reveals that fifty seven per cent of firms now anticipate higher selling prices in the June quarter than a year earlier, while three per cent expect a decrease. This result comes on the back of national accounts and retail sales figures which indicate that domestic spending has started to moderate.

Following high December quarter expectations, the outlook for growth in profits has declined to an index of zero. Thirty two per cent of executives now expect an increase in profits and thirty two per cent expect a decline. This flat growth outlook reflects the impact of lower sales volumes and higher costs.

Sales growth expectations have also declined from December quarter highs, with 38 per cent of executives now expecting an increase in sales growth in the June quarter. Despite the decline the sales index is significantly higher than twelve months ago, with sales growth expectations up thirteen points on the June 2007 quarter. The net retailers’ sales expectations index is particularly strong; at twenty nine it is fourteen points above the all firms index of fifteen.

Expectations for capital investment have strengthened marginally with the overall net index now at two per cent. Durables manufacturers are showing quite strong expectations for growth in capital investment with the index at seven per cent.

The employment indicator has returned to negative territory after one quarter in the positive. Twelve per cent of executives now expect to have more staff in the quarter ahead than they did a year ago; thirteen per cent expect to decrease staff numbers.

Executive concerns regarding the tightening credit market remain high, with more than half (56%) of executives expecting a tightening of credit will have a negative impact on operations.

Meanwhile, just nine per cent of executives anticipate that they will seek finance or credit to help their business grow in the quarter ahead. These findings come as the RBA warns that banks will make borrowing harder as part of the process of reigning in excess growth in the economy.

According to Christine Christian, Dun & Bradstreet’s CEO, early indications of an economic slowdown are positive however the wide reaching impacts of inflation are likely to continue impacting business for some time.

“Early signs of an economic slowdown are beginning to show through in executive expectations for sales, profits and selling prices. National accounts data and retail sales figures are also indicating a slow down,” said Ms Christian.

“The impact of the high cost of funding and the tighter credit market are being seen in expectations for business growth – less than ten per cent of executives expect to seek finance to grow their business in the coming quarter.

“All of these figures indicate that the RBA’s fight against inflation is beginning to take effect. However, despite this, it is likely that inflationary pressure will continue to have wide-reaching impacts on the economy for some time.”

Topping the list of concerns this month, thirty nine per cent of executives rank interest rates as the most important influence on operations. This figure remains unchanged since the previous survey however concerns from the retail sector have increased by eight per cent. Fifty three per cent of retail executives now rank interest rates as the most significant influence on operations in the coming quarter. The continued high level of concerns regarding interest rates, particularly by retailers, comes as the official cash rate has reached a 12 year high.

Wages growth has overtaken petrol prices as a primary concern for executives. An increase of 14 per cent in this index since December has pushed concerns to their highest level in eight months. Twenty seven per cent of executives now expect wages and salary growth to be the most important influence on their business in the quarter ahead. This relatively steep increase is likely a reflection of executive concerns that high inflation figures could feed back into wages expectations.

Petrol price concerns have eased slightly but remain high as oil prices continue their surge above USD $100 a barrel. Twenty six per cent of executives rate the cost of fuel as the most important influence on operations.

Meanwhile, the impact of recent movements in petrol prices remains unchanged since the previous survey, with 78 per cent of executives noting a negative impact on operations.

According to Dr Duncan Ironmonger, Dun & Bradstreet’s economic consultant, the Australian economy needs to see an increase in capacity and a reduction in demand if inflation is to be constrained in 2008.

“Capacity increase will be a slow process dependent on increases in labour supply and infrastructure. As a result, all official policy action is focused on quickly reducing demand,” said Dr Ironmonger.

“According to the December quarter national accounts and retail sales for January, a slow down in consumer spending is under way. A continuation of this slow down is critical if inflation is to ease this year.

“The Reserve Bank pushed the cash rate up to 7.25% last week. This move combined with other increases in the cost of funds has resulted in home mortgage rates reaching a level of around 9%; this may be sufficient to put the inflation genie back in its bottle.”


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