Troubled times ahead

Australia’s business executives are anticipating a bleak September quarter as high fuel prices, continued inflationary pressures and slowing consumer spending hurt sales and profit margins.

The latest Dun & Bradstreet (D&B) Business Expectations Survey reveals that businesses are expecting a steep decline in sales, profits, employment growth and capital investment, with all of these indexes now in negative territory.

This comes on the back of an increase in the number of executives reporting negative impacts on their business due to soaring fuel prices (climbing 21% since March to 82%) and more organisations being hit by a slowdown in consumer spending (up 2% in one month to 38%).

Supporting expectations that inflationary pressure will continue throughout the year, the selling prices indicator has risen five per cent to an index of fifty. Despite the increase, the index remains lower than four of the last five quarters, now fifty seven per cent of executives expect to raise selling prices in the September quarter.

Reflecting poor results in the March quarter, expectations for sales growth have dropped 33 points from December quarter highs. Forty per cent of firms saw a decrease in sales in the March quarter and the same percentage of executives anticipate a fall in sales in the coming quarter. Nondurables manufactures have been particularly hard hit, with the actual sales index falling 45 points from the December to the March quarter. Despite being the only industry with a positive actual sales index for the March quarter, durables manufacturers have also reported a negative outlook for September quarter sales.

Profits expectations have also fallen sharply, down 29 points since the December 2007 quarter. This decline in expectations is a reflection of poor March quarter results, particularly for nondurables manufacturers and retailers.

The employment indicator has hit its lowest level in 17 years. Twenty per cent of executives expect to have fewer staff in the quarter ahead than they did a year ago while just 10 per cent expect to increase employee numbers.

A significant weakening in capital investment expectations has resulted in the overall index dropping to minus six however durables manufacturers remain just inside positive territory at an index of two.

According to Christine Christian, Dun & Bradstreet’s CEO, the impacts of a slowing economy combined with high petrol prices are impacting executive expectations for the September quarter.

“Poor results in the March quarter combined with continued pressures from inflation, the credit market, high fuel prices and slowing consumer spending have led the steep decline in executive expectations for the September quarter,” said Ms Christian.

“The business community is now anticipating a rapid slowdown in activity in the coming months.

“Adding to the list of challenges, better than expected GDP results for the March quarter have fuelled speculation regarding the need for a further rate rise. Any further increase in the cost of credit will likely add pressure to a number of businesses, with SMEs likely to feel the greatest burden.”

Up nine per cent since the previous survey, credit market turmoil continues to represent a significant concern. Two thirds (67%) of firms surveyed indicated that a tightening credit market will have a negative impact on operations in the coming quarter. Ten per cent anticipate a very negative impact.

Despite the RBA keeping interest rates on hold for the past three months suggestions that rates may need to rise again to contain inflation are evident in executive concerns, particularly in the retail sector. Almost half of firms surveyed (47%) rank interest rates as the most important influence on operations in the new financial year, this jumps to 57% for retail executives.

Fuel price concerns have increased as petrol prices have continued to rise. Twenty five per cent of executives now rate the cost of fuel as the most important influence on the business in the year ahead. Meanwhile wages growth concerns have risen nine per cent to be on par with fuel prices.

According to Dr Duncan Ironmonger, Dun & Bradstreet’s economic consultant, the Australian economy has started to slow.

“Last week’s March quarter GDP numbers confirm the start of an economic slowdown. Although income tax cuts in the Federal Budget will provide some stimulus, interest rates and credit will remain tight for the remainder of 2008,” said Dr Ironmonger.

“The Reserve Bank left the cash rate unchanged at its last three meetings however it could make a further increase if demand does not continue to moderate or if expectations of continued high inflation begin to affect wage and price setting.

“Tight monetary conditions, high petrol prices and low consumer sentiment should continue to dampen consumer spending and housing construction through the next few quarters.”

The D&B index for expected sales is down 28 points to -13, with 27% of executives expecting an increase in sales and 40% expecting a decrease. The profits index is down 20 points to -17, with 23% of executives expecting profits to rise and 40% expecting a fall.

Employment expectations are down 14 points to an index of -10, with 10% of executives expecting an increase in staff and 20% expecting a reduction. Capital investment expectations are down 12 points to an index of minus six, with 9% of executives expecting an increase and 15% expecting to cut spending. Inventories expectations are down 10 points to an index of -10.

The selling prices index is up five points to an index of 50, with 57% of firms expecting to raise prices and 7% expecting to decrease them.

 

Virgin to lose routes

Virgin Blue may soon join other airlines’ recent moves to cut services due to surging fuel prices.

With fuel costs remaining record high, the company has been forced to review some of its Queensland routes, a Virgin spokeswoman told the ABC.

She said that along with the reduction of its Gold Coast schedule, the airline is also considering introducing a luggage tax, as toughened security screening made it more costly to check-in luggage than it did to check-in people.

The Queensland Government is urgently injecting $4 million in tourism funding to alleviate the impact of reduced flight services announced by Jetstar and Qantas last week.

Amidst fears of a possible recession in its tourism industry, the mayor of Whitsunday Regional Council Mike Brunker told the ABC that it was better to increase fares than to have no flights available.

“Hopefully, Virgin is actually smart enough to do that and we’ll give Virgin the red carpet treatment when they come to the Witsundays,” he said. 

Virgin is expected to make an announcement on the charges and schedule adjustments this week.

Going on strike is no answer: ATA

Despite the hardships currently faced by the trucking industry, the proposed two-week shutdown from July 28 is not the answer, the Australian Trucking Association (ATA) said.

ATA chairman Trevor Martyn said while trucking companies are in crisis due to the spiralling price of diesel, going on strike would not provide a solution to their difficulties.

“Many people in the trucking industry are now watching their life’s work collapse around them. But going on strike and standing around truck stops for two weeks isn’t the answer,” Mr Martyn said.

“The price of diesel is going up across the world because of China’s massive demand for fuel. Holding a two-week strike in Australia will have no effect on prices at all.”

He said instead of seeking an ineffective measure, trucking operators need to devise reasonable strategies by reviewing their costs on a weekly basis and negotiating with customers to lift freight rates.

“Some companies will need to increase their freight rates by more than 20 per cent,” he said.

“Most importantly, they need to refuse to accept jobs that do not pay enough to cover their costs.”

Mr Martyn added the introduction of new fatigue management laws in September is among the industry’s biggest concerns and called for a national uniform regulation to ward off inconsistencies.

He said: “The new laws will be an absolute fiasco, because the state and territory governments are out of control and have ignored the industry’s need for consistency across the state borders.

“The only solution is for the Australian Government to take over heavy vehicle regulation. The states have had their chance and failed. We need national regulation with strong involvement from the industry.”

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