By Greg Peel
Dunn & Bradstreet has today released the findings of its September quarter survey of Australian business executives. On the whole the mood is mixed looking ahead to 2013, with sales and inventories expected to fall but investment and profits expected to rise.
The National Business Expectations Survey notes a pullback in sales expectations from the June quarter but to a level which remains high by recent standards. D&B's sales index has fallen by 12 points to 21 quarter on quarter but 21 remains the second highest reading in the past eight quarters. The survey shows 43% of respondents increased sales in the quarter on a year on year basis. Lower sales expectations from June to September are matched with lower inventory expectations as the former feeds on plans for the latter.
If sales are indeed lower going forward, it won't be a result of overpricing. D&B's selling price index fell seven points to plus five in the quarter to the lowest level in survey history (1988) and 24 points below the 10-year average. If we weren't already aware, clearly headline inflation is historically low. Lower sales and selling prices feed into lower employment expectations, with D&B's findings on the labour front consistent with other measures such as the declining ANZ job ads series. The employment expectation index has fallen two points to minus one, or two points below the 10-year average of plus one.
With inventories, sales and selling prices dropping, one might expect a dour outlook for profits or investment intentions. However surprisingly the opposite is true. D&B's profit index rose four points in September to 24, which is the highest level in eight quarters and 19 points above the 10-year average. Logic thus suggests Australian businesses are adopting very tight cost controls, which would be consistent with low inventory carry and a lack of hiring. The difficult cost to manage is fuel prices, with 39% of respondents citing fuel costs as their primary concern going into the March quarter, up from 29% in June.
On the capital investment front, lower interest rates and the prospect of further cuts ahead are clearly sufficient for businesses to take the opportunity to invest. D&B's capital investment expectation measure is up two points to 17 and 12 points above the 10-year average.
So what to make of these mixed results?
"Overall business conditions remain solid," suggests D&B economic advisor Stephen Koukoulas, "driven by a rise in net sales and profits during the September quarter. However, expectations for the quarter ahead are patchy, with a weaker outlook for employment and moderate sales, The most positive aspect of the outlook is a sharp rise in expected profits".
The rise in expected profits is an interesting case in point following the recent listed company AGM season. On a net basis, earnings expectations have again been wound back, with the once high flying mining services sector a particular contributor to forecast cuts. Capital expenditure intentions, as per the recent ABS capex survey for the September quarter, confirms the pullback in mining sector spending plans the RBA is concerned about. However it is notable that for the first time in a very long time, last week's broker upgrades to stock ratings exceeded downgrades. Earnings forecasts may have been reined in yet again but stock prices have been punished to levels considered an overshoot in some cases.
We are potentially at a point where earnings expectations for listed companies have now re-based to a sufficiently low level. Match that with the profit expectations of D&B's business respondents and 2013 looks a little brighter. But then it will all come down to just how the global economy performs next year, and while China may have bottomed there's little joy among developed world economies.