Mid-market companies cautiously optimistic
Mid-market companies are less confident than they were in March, but confidence is significantly higher than it was 12 months ago, according to a Commonwealth Bank survey.
According to the bank's latest Future Business Index, which covers the six-month period to the end of September, confidence declined from 9.3 points to 4.3 points. But this figure is a significant improvement on 12 months ago when confidence was at -0.3.
The index measures the opinions of financial decision makers in companies with a turnover of between $10 million and $100 million. CBA says the sector makes up 38 per cent of GDP, generates $400 billion in revenue annually and comprises 27,000 companies.
The research shows mining companies who took part in the survey were particularly positive about the outlook for business conditions. There was a seven point increase in the confidence of this portion of the index since the last survey to 17.7 points.
There was a surprise turnaround in the outlook of retail businesses measured in the survey, with confidence of those surveyed jumping 11.2 points to 10.2 points.
Symon Brewis-Weston, the bank's general manager of corporate financial services, said the improvement in retail sector sentiment could be attributed to the effect of interest rate cuts and carbon tax offsets, which have reduced tax for low income earners.
CBA chief economist Michael Blythe said the survey results were encouraging.
“There's been a debate about whether monetary policy works. [This shows] if you put cash in the hands of consumers they will spend. Lower rates do have an impact even with something of a lag,” he said.
Blythe also said the uptick in the retail sector had been reflected in the bank's credit card data, with consumers now increasing their credit card spending.
Sectors covered in the index that have experienced declining confidence include construction, with sentiment on -11.1 points, business services on -17.9 points and transport and logistics on -18.2 points.
On a state-by-state basis, all states with the exception of Tasmania showed declining business confidence. This played out most dramatically in South Australia, where confidence dropped by 17.4 points to -10.1 points.
The bank attributes this to BHP Billiton shelving its plans to expand its Olympic Dam mine. Western Australia also suffered a significant drop in confidence, down by 16.7 points to -2.0 points. New South Wales is the most confident state but even it suffered a drop in confidence of 3.6 points to 10.4 points.
Brewis-Weston said risk appetite among mid-market companies has fallen since the March survey, which may lead to a hiring slowdown.
Looking ahead, the survey showed mid-market enterprises expect further fluctuations in business conditions. “People have become used the volatility,” he said, adding that businesses in the retail and mining sector were likely to be best prepared for further volatility in trading conditions.
Brewis-Weston said continuing volatility could be viewed in a positive light because “it helps keep businesses healthy".
“Half the companies surveyed are expecting revenue rises. Operating costs are also up because of an increase in energy and wholesale fuel prices,” he said.
The top four domestic issues keeping company chiefs awake at night include rising energy costs, government policy decisions, the price on carbon emissions and rising fuel costs.
According to the survey, 44 per cent of respondents expect their businesses to be more profitable in the coming six months. Thirty-three per cent expect capital expenditure to increase and 30 per cent expect to take on more staff.
Blythe referred to a “potentially large pothole in growth” as a result of the slowdown in the mining sector. He said the Reserve Bank's decision to reduce interest rates was a tactic to generate an economic recovery on the back of consumer confidence.
“The transition of the non-mining part of the economy would be easier if the Australian dollar was lower,” said Blythe.
Survey participants said over the next six months the top three activities they will focus on include investing in their business, expanding their business locally and merger and acquisition activity.
Overall, the results from the research showed larger organisations are more optimistic than smaller businesses, thanks to comparatively better buying power and more disciplined cost management.