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.

Retail growth is stalling

Figures published in the latest edition of the quarterly CHEP Retail Index, which uses transactional data from CHEP pallet movements to provide an indicator of Australian Bureau of Statistics retail trade data, have signalled minimal retail sales growth in Q2 2018.
The modest growth in pallet movements in the first few months of 2018 suggests that retailers expect the trading environment to be soft over the next few months. Retail sales growth has been moderate in the past three months, with solid growth in February following a weak result for December 2017. Yet, in annual terms, retail sales growth has been improving since a low point around September last year.
Looking ahead, the economic environment supports some further modest improvement in retail sales growth in 2018, with recent strong employment growth and a likely pickup in wage growth flowing through to higher consumer spending.
Key figures

  • 2.6% year-on-year retail turnover growth of $26b to the month of March 2018, with year-on-year figures for the month of May static at 2% consistently.
  • On a quarterly basis, 2.6% year-on-year growth for the March quarter and moving to 2.3% year-on-year for the June 2018 quarter.

Providing commentary on the index, partner at Deloitte Access Economics David Rumbens noted: “Retail sales growth remains modest, with consumers experiencing little wages growth, and confidence remaining fragile. However, a particularly weak patch for retail sales in the second half of 2017 appears to be behind us, and the stunning growth in employment that we continue to witness should lend some support to retail spending in the near term.”
 

Warehouse sales set to increase in 2016

It is interesting times for Sydney Industrial property in 2016 as we see demand for prime industrial properties relatively strong along with a diminishing supply of serviced and industrial zoned land.
With South Sydney and parts of inner and central Sydney areas continue to be rezoned and redeveloped to cater for mixed use development, more tenants are being forced to make locational and operational decisions around their warehouse property requirements.
Whilst staying in inner and central areas and competing in a shrinking industrial market is the only consideration for some, more companies have migrated to the outer west to achieve cost effective and operational suitable facilities.
With new development and prime grade leasing activity being relatively strong in key outer west suburbs over the last 3 years and only limited new industrial zoned and serviced land entering the market at the same time, it has become more challenging for companies to find the right property.  The market is currently fielding some significant requirements for large warehouse D&C facilities (i.e. 25,000m2 plus) and it is said at this time there are only a handful of land opportunities that could meet these building requirements.
The limited prime grade facilities and suitable land is also having an impact on companies seeking prime grade warehouse facilities in the 3,000m2 – 6,000m2 size range, especially in the M4 and M7 corridor.  Development in the outer west area can focus on facilities greater than 10,000m2 and supply below 6,000m2 can be limited and tightly held either with tenants or owner occupiers.  We have recently experienced this lack of supply with some clients and situations where companies have had to move quickly to secure buildings, often competing with multiple parties.  In some instances landlords who have undertaken some developments under 10,000m2on a speculative basis have been able to lease these prior to construction being completed.
There are still opportunities in the market but it may be another 2 years before we see more significant parcels of serviced and zoned industrial land become available. It is important for companies to invest in completing strategic reviews of their industrial property, including timing and cost considerations, for their next property lease.  Companies should:

  1. Understand current availability and future stock levels in current or future locations and how this will impact on their timing.
  2. Start discussions early with landlords should they wish to remain in existing premises and put in place strategy to achieve the most cost effective outcome for their business
  3. Assess whether the existing premises can be reconfigured  to allow an extended period for the short to medium term
  4. Get internal pre approvals, included expected capital costs, before going to the market looking for new space
  5. Depending on size and requirements start looking at your lease requirements 1 – 2 years from existing lease expiry

Luke Stafford is the Director of Symmetry Partners, an independent corporate property advisory company who represents and advises occupiers of commercial and industrial property throughout Australia.

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