Business confidence hits a two-year high

| January 11, 2018

The new Illion (formerly Dun and Bradstreet) business confidence survey for the first quarter of 2018 paints a rosy picture for the Australian economy.  Overall business confidence has reached  its highest level since the fourth quarter of 2015 and manufacturing confidence has reached its highest level since June 2003.

A resilient construction sector and resurgent manufacturing industry have the most confident outlook for the New Year.  Driven by strong expectations for profits, selling prices, capital investment and employment, both sectors topped the indices for the March 2018 quarter.

Each month, illion asks a range of Australian executives if they expect an increase, decrease or no change in their quarter-ahead sales, profits, employees, capital investment and selling prices compared with the same quarter a year ago. The firms are also asked for actual changes over the twelve months to the latest completed quarter.  The latest report is based on 1,200 responses obtained during the last 3 months of 2017.

Illion Economic Adviser Stephen Koukoulas said the growth in current performance and future expectations is driven by a stronger global economy, low interest rates and a fall in the foreign exchange rate of the Australian dollar to a more competitive level.

CEO Simon Bligh agrees that business confidence appears buoyant for early 2018. Strong expectations for profits and employment are support by greater capital investment planning which should maintain the momentum.  He highlighted the ‘good spirits’ of the manufacturing and construction sectors as signalling the underlying strength of the economy.

Expectations Highest Since 2015

The positive outlook was supported by Illion’s Business Actuals Index, which has reached 15.8 points, its highest level since March 2004, after an increase of 80.6% in a year.  Expectations in the Construction industry have increased to 17.7 points,  almost three times higher than the same time last year.

Koukoulas identified a sharp upswing in profits as the main driver of this positive tone, although sales, selling prices and employment have also improved.  The broad-based nature of the lift in business expectations bodes well for the economy in the near term and will encourage the RBA to maintain current interest rates.

Manufacturing strong but retail falters

Expectations in the manufacturing sector reached multi-year highs across several sub-indices, demonstrating the resilience of Australian manufacturers in the face of last year’s  automotive plant closures and ongoing concerns over energy costs. The one factor that could weigh  on the sector in the coming months is the shortage of skilled labour, which was identified as the main barrier to further expansion.

Construction continues to benefit from new housing activity, buoyant public infrastructure spending and a reasonably widespread recovery in business investment while manufacturers which braved the global financial crisis and the Australian dollar above parity are now in a healthy financial position, buoyed by a stronger global economy and a lower Australian dollar.

Capital investment

The Capital Investment Actuals index for all industries rose to 11.3 points for the quarter to September 2017, representing annual growth of 24.6%. Transport,  communications and utilities had the highest index score for actual investment, while retail languishes at the bottom of the heap. Expectations for capital investment remain muted, however, down 7.5% on this time last year at 10.9 points.

There remains significant divergence between sectors, reflecting the changing in patterns in Australia’s ‘multispeed economy’. Retailers reported weak performance and low expectations, due to the fragile financial position of many Australian consumers. Weak wages growth in concert with record high debt levels are constraining income and hence purchasing power of the household sector, hitting high street sales.

Road bumps ahead?

Consumer confidence remains a key factor for business, with almost one third of businesses (31.9%) citing it as the major influence on their operations in the coming quarter. While all sectors were concerned about higher utility and operating costs, different sectors identified a range of other factors when asked what the primary barrier to growth in early 2018 might be.

Manufacturers and services cited a shortage of skilled labour while wholesalers and retailers were afraid of online sales from their competitors.  The construction raised weaker demand for their products while the finance, insurance and real estate industries underlined the problem of higher overheads and costs.

Commenting on the results, Stephen Koukoulas said that inflation risks, measured in the form of expectations for selling prices, are increasing moderately from a low base. Given the link between this aspect of business expectations and the official inflation rate, he predicted that inflation would remain in check for the New Year.

However he warned that expectations for selling prices will be a key factor in the interest rate deliberations of the Reserve Bank of Australia, with any further upturn likely to spark early speculation about an interest rate rise.