Business outlook for 2019

OPENSEED Digital Consultancy

The political landscape may have experienced a shakeup, housing in Sydney and Melbourne may have endured a slump, but according to economic experts the future for Australian business is generally bright, despite a recent decrease in business confidence and conditions.

Here’s the business outlook for 2019, and the factors contributing to the forecast.

Solid growth

In its annual forecast for the year ahead, economic experts Deloitte predicted continuing solid growth for the Australian economy, tempered slightly by household debt and global machinations.

“The Australian economy remains a standout among developed economies, supported by favourable global conditions and strong domestic demand from population growth,” they reflected.

“However, global uncertainty and high household debt may weaken growth prospects.”

They noted annualised economic growth was at over 3 per cent across the first half of 2018 and “the current combination of a supportive global environment and growing domestic demand should see it stay there for the remainder of 2018 and 2019”.

Strong employment

On the back of solid growth, comes strong employment figures, with Australia’s unemployment rate hovering just above five per cent.

That figures represents the lowest rate since 2012, according to Trading Economics.

While that means more Australians have cash in their pocket, for business, increased employment equated to increased wages and labor costs.

Meanwhile, Deloitte noted lower unemployment could also reveal further challenges.

“We expect this to fall further over time, creating the conditions for a very gradual rise in wage growth.

“However, that eventual pick-up in wage gains will likely generate additional inflation, leading to an increase in the central bank’s benchmark interest rate, which has been at the historic low rate of 1.5 percent for over two years.

“The return to more normal interest rate settings will place pressure on Australia’s heavily indebted households, and will also put the brakes on broader economic growth, testing its ability to remain above an annual rate of 3 per cent over the medium term.”

Business confidence

Despite Australia’s generally positive economic outlook, in December, the NAB monthly’s business survey noted both business conditions and confidence were in a slight continuing decline for the first time since 2012.

In November, confidence fell two points to +3, while reported conditions also eased two points to +11. While both indicators remained in the positive, NAB speculated the business sector had “lost some momentum”.

“Declines in business confidence to below average levels also suggest businesses’ outlook is for momentum to ease further. Indeed, forward orders (the most reliable indicator of domestic demand) fell in the month and are now below average for the first time since late 2016.”

Delving deeper into the issue, the NAB noted a combination of factors were driving the downward trend.

“Respondents rated issues such as consumer demand, high wages cost levels, margin pressure and difficulties in obtaining suitable labour as key issues. House prices and fuel costs were not rated as key issues (12th and 11th issues of importance out of a possible 17 potential problem issues).”

And some industries were affected more than others.

“Construction saw a sharp fall in conditions this month (but has been volatile) while transport, manufacturing and mining also saw a decline in the month.

“Retail and finance, business and property services saw small improvements in the month. In trend terms, conditions are highest in mining and weakest in retail.

“Confidence (in trend terms) remains highest in mining, followed by manufacturing and construction. Retail, finance, business and property services and recreational and personal services remain the weakest.”

Business outlook

Despite wavering confidence and a slight decline in conditions, Deloitte had a relatively bright outlook for the businesses in the year ahead.

“Measures of business conditions remain at elevated levels on the back of solid economic growth and increased profitability even as business confidence has wavered in recent times,” they noted.

“The dichotomy likely reflects greater uncertainty on the global outlook due to the escalating trade dispute between the United States and China, and emerging market jitters as US interest rates rise.

“That said, expectations for business capital expenditure are on the rise based on improved profitability—a good sign as business investment has largely been a drag on growth in recent years.

“The revival of business investment is an important ingredient in keeping Australia’s economy growing over the medium term as household consumption growth may fade (constrained by high debt levels).”

Current business statistics

According to the latest figures from the Australian Bureau of Statistics, at the end of 2016-2017 there were 2,238,299 actively trading businesses in the market sector in Australia, an increase of 3.1 per cent (66,755 units) from the end of 2015-16.

During that period 328,205 businesses commenced (an increase of 5.7 per cent on the year prior) while 261,450 exited (also a slight increase on 2015-15 an increase of just 0.5 per cent).

New figures are due to be released in March this year.

Business on guard

In the meantime, with the prospect of decreased household expenditure ahead businesses have been warned to watch their cashflow closely.

Last year Smart Company reported “thousands of Australian businesses” were on the brink of collapse as weak property markets made SME owners “skittish”.

“The SV Partners Commercial Risk Outlook Report for August 2018 shows there are 9,948 businesses with annual turnover of less than $50 million that are at “high risk” of insolvency in the next 12 months, with political uncertainty and a downturn in property markets pinned as the main contributing factors,” they noted.

Although house prices only ranked 12 out of 17 possible reasons for deteriorating business confidence according the NAB, Smart Company said Australian business was so welded to property markets that when it started to see a downturn a certain level of discomfort ensued.

Meanwhile SV Partners managing director Terry van der Velde told Smart Company SMEs should have a “rigorous” approach to risk management to try and prevent insolvency where possible.

“SMEs often struggle more with solvency than larger businesses, as their smaller income streams, tighter margins and difficulties sourcing finance can make dealing with short-term shocks more challenging,” van de Velde said in a statement.

“That’s why small and medium-sized business owners need a rigorous approach to risk management, to ensure that their business has a plan to deal with unexpected situations.”

Meanwhile, in the same story, CreditorWatch research was highlighted, indicating the number of unincorporated businesses that had gone from active to inactive between March 2017 and March 2018 was up 60 per cent

They noted these findings suggested the businesses being hit the hardest were also the smallest.

“We’re seeing people really struggle from a cash flow point of view, and we know from our research that it’s pretty much a 50/50 split between SMEs that are running cash flow positive and those that aren’t,” CreditorWatch managing director of credit reporting Patrick Coghlan said.

Mr Coghlan put this down to the ever-present issue of payment times, saying a lot of SMEs were still finding it hard to get payments on time.

Meanwhile, in 2017, the Australian Securities and Investment Commission noted inadequate cash flow or high cash use was a leading cause in 46.7 per cent of business failures.

The sentiment was echoed in a study by University of Technology, Sydney which found bad costing and delayed invoicing along with giving too much credit, resulting in bad debts and slow payment were among the 12 top reasons for businesses closing.

The final word

It’s clear as we enter 2019, business may be the beneficiary of a mixed bag of expectation and reality. Although the Australian economy remains strong, there is volatility in housing, politics and international affairs.

Deloitte might note the outlook for business is bright, despite decreased confidence, but the businesses best poised to weather the murky conditions ahead will be those with a plan, a risk management strategy and a very real resolve to keep their cashflow under tight control.

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