Service sector confidence grows ahead of 2018

Australia’s service sector is in a buoyant mood ahead of 2018 according to illion’s latest Business Expectations Survey. The sector’s optimism is supported by strong results for sales and selling prices for the September quarter of 2017, which reached their highest levels in five years. The headline Business Expectations Index is 20% also higher than this time last year, driven by a seven year high in profit expectations.

Illion Economic Adviser Stephen Koukoulas said ‘the generally buoyant Business Expectations survey bodes well for the economy, even allowing for ongoing pockets of weakness in the retail and finance, real estate and insurance sectors. It appears a combination of strong growth in public spending, including on infrastructure, low interest rates and a more positive tone from the global economy are feeding the relative optimism.’

Illion CEO Simon Bligh also welcomed the growing confidence of the services sector, noting that ‘a strong, diverse and confident services industry is vital for Australia to successfully transition from a producing economy to a knowledge economy. Mining and construction have driven growth over the past decade, but services employs more people than any other sector in Australia, encompassing a broad range of professional and recreational business.’

The survey of 400 executives conducted by D&B, found that manufacturers were also surprisingly upbeat in a month that saw the last Australian-made cars roll off the production lines. Manufacturers’ expectations for selling stock, hiring staff, business investment and increased prices of goods are all well up on this time last year.

The rise in expected selling prices suggests a potential for inflationary pressure in 2018, although the rise is from a low base. If realised, this would see the market continue to price in a risk of interest rate increases from the RBA, however actual selling prices tend to lag behind expected changes in selling price.

In stark contrast to the Services sector, confidence among retailers remained weak. Last month’s BEX report also revealed a downbeat mood among retailers ahead of the crucial Christmas trading period.

The difference in confidence levels between the two sectors underlines the growing preference for younger or more affluent consumers to spend their money on experiences, rather than material goods. While this trend may be driven by a desire to post interesting pictures on Instagram and other social media, rather than part of any spiritual quest, it is undoubtedly adding more pain to retailers already struggling to counter online competition.

Koukoulas argued that ‘the pessimism in the retail sector remains linked to the weakness in wages growth and the impact of the sharp increases in electricity bills, which continue to undermine the purchasing power of consumers.’

Australia’s central bank also warns that a strengthening labor market will eventually drive wage gains and faster inflation, and while business investment has seen a ‘solid upward trajectory, household spending remains uncertain with retail sales over the last three months the weakest they have been in seven years.

Utility bills remain a pain point for both Australian businesses and consumers alike, with almost one in five businesses seeing it as the biggest barrier to growth in 2018. A notable exception was the construction sector, with more than a quarter of businesses citing a shortage of skilled labour as the primary barrier to growth in the next 12 months. Interestingly a shortage of funding, which is linked to bank lending and interest rate levels, remains the least significant issue, lagging behind other problems by a large margin, for the business sector.

Actual results for all businesses covering the September quarter 2017 were also bullish – up 23% on the same time last year – driven by greater sales, profits and employee numbers than 12 months ago. Actual sales are at a 13-year-high and actual profits are at their highest level in five years. Although businesses in the retail, finance, insurance and real estate sectors are less confident than others for the new year, the business outlook for the early part of 2018 is solidly positive, which should in turn drive growth in GDP.