Business Expectations Survey: confidence tanks

Graph: Business Expectations Index, March Quarter 2019.

Business confidence for the March quarter has fallen across the board, with the illion Business Expectations Index for the March quarter 2019 down 7.1 per cent annually. The headline index saw significant declines in the sales, profit and investment sub-indices on both a quarterly and annual basis.
The manufacturing sector is expecting a particularly grim start to the year, with expected sales plummeting 32.4 per cent year-on-year, while profit expectations have fallen 23 per cent. By contrast, retailers are expressing more optimism heading into 2019, with the sector reporting increases in both expected and actual sales, profits and capital investment.
Soft start to new year
There were sharp declines in expectations across all categories of the survey, with sales, profits, employment and capital investment all falling. If these expectations are realised, it is likely that economic performance over 2019 will significantly undershoot the latest forecasts from the Reserve Bank of Australia. Based on the latest survey data, the economy is likely to experience a soft landing in 2019, while any further downturn in business expectations will raise the possibility of significantly weaker economic conditions.
“There were sharp declines in expectations across all categories of the survey, with sales, profits, employment and capital investment all falling,” said illion economic adviser Stephen Koukoulas.”
If these expectations are realised, it is likely that economic performance over 2019 will significantly undershoot the latest forecasts from the Reserve Bank of Australia. Based on the latest survey data, the economy is likely to experience a soft landing in 2019, while any further downturn in business expectations will raise the possibility of significantly weaker economic conditions.”
“The final business expectations results for the March quarter reflect widespread uncertainty among Australian business,” said illion CEO Simon Bligh
“Local factors driving uncertainty include the approaching federal election, while everything from the flow of credit and residential house prices through to regulation and corporate governance will be impacted by the Royal Commission, due to deliver its final recommendations in early February.
“Globally, equity market turbulence in the US, Europe and Asia has carried into the new year. This is being compounded by additional unknowns such as US political division crystallising in the form of an extended government shutdown, Brexit entering its endgame and increasing signs of China’s economy slowing.
“Despite all the noise, Australia’s business landscape remains fundamentally sound, with unemployment historically low, exports holding firm and major long-term government projects either underway or about to start.”
Heavy declines across all indices
“The latest illion Business Expectations survey shows a further moderation in economic conditions at the end of 2018, and indicates a potentially disconcerting start to 2019,” said Mr Koukoulas.
“The decline in the expectations index fits with recent economic news, which shows weaker economic growth, a sharp downturn in housing and weaker global conditions. The 15.5 per cent decline in the Actuals index could also point to a weak end to 2018, a view backed by recent disappointing official data for September quarter GDP.”
The Business Expectations index for the March quarter now stands at 20.9 points, down 12.9 per cent from the prior quarter and marking a fall of 7.1 per cent on a year-on-year basis. Meanwhile, the Actuals index followed a similar pattern, dropping 15.5 per cent between the June and September quarters, and down 3.7 per cent annually.
Bleak expectations for March quarter
Expectations for financial performance are down across the board, with the majority of industries predicting a significant slump heading into the March quarter. The most notable decline in expectations comes in the form of sales numbers, with the overall index dropping by 17 per cent to 30.2 points. Employee expectations also took a hit, with a reported 5 per cent decline, while profit forecasts slumped 12.5 per cent to 23.9 points. Expectations also appear to be on a downswing compared to the previous year, with sales down 11.7 per cent annually and the profit index 8.8 per cent lower.

Sub-indices Expectations, March Quarter 2019.

“The reported decline in expectations came from all categories of the survey – sales, profits, employment and capital investment were all lower than the last uptake,” said Mr Koukoulas. “If these expectations come to fruition, economical performance heading into the 2019 calendar year will significantly undershoot the latest forecasts from the Reserve Bank of Australia.”
Optimism at a low point
Businesses have become less optimistic on growth prospects, with 61.4 per cent of business owners and executives surveyed in December reporting an increase in optimism, down from 66.6 per cent in the November survey. Meanwhile, 27.2 per cent of businesses said they felt less optimistic about growth prospects, compared with only 20.9 per cent in November. The last time optimism responses fell so low was in August 2017.
Optimism at lowest point since August 2017.

“The slowdown in the economy is beginning to affect business optimism,” Mr Koukoulas said. “While not at levels that would signal a hard landing for the economy into 2019, the decline in the number of firms which expressed an optimistic outlook for the March quarter, as well as the rise in pessimism, is pointing at a clear downside risk if the trend continues.”
Selling prices expectations up
Although the economy is expected to make a soft landing over 2019, one element of the data is at odds with this idea – both expected and actual indices for selling prices increased, with expectations up 7.6 per cent over the previous quarter, and up 38.9 per cent compared with the same time last year. Actual selling prices jumped 18.9 per cent over the previous quarter and up 10.9 per cent on the year-earlier period.
Selling Prices Index, March Quarter 2019.

“The lift in expected selling prices in the data is the one point that contradicts the business sector’s slowing momentum, Mr Koukoulas said. It is possible this increase was caused by inflation effects flowing on from the Australian dollar’s recent weakness, but official data on the topic suggests inflation is currently low.

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