- Businesses plan to lift prices
- Earnings expectations on the rise
- Further cuts to costs, staff and investments coming
- Employment casting a pall over proceedings


By Andrew Nelson

Australian business spending expectations have started to lift from the 24-year low posted last quarter. Price increases has become the new plan for the new financial year, with business looking to retain profits and keep up with escalating cost pressures and softening sales growth.

Dun & Bradstreet has released its National Business Expectations Survey and the data show that despite the soft outlook for the September quarter, more businesses plan to raise prices than did the previous quarter. The survey's selling price index has pushed up to 7.6 points, a decent lift from the 2.5 read in the second quarter of 2013.

The prospect of higher prices has also encouraged businesses to lift their profit outlooks for the quarter to come. The general hope is that the higher prices will be able to offset increasing operating costs and slow sales activity by lifting margins.

Of great assistance to the survey numbers was the newfound weakness in the AUD. The strong Aussie effectively capped profitability for a significant proportion of domestic businesses. This was especially so in manufacturing, exporting and retail, or basically any business that has been pressured to compete on price. But with the AUD coming off rapidly, D&B reports that 58% of businesses now expect the Aussie will have no impact on Q3 operations.

There is, of course, a tail side to this coin as well. D&B reports that despite increasing the confidence in earnings, expectations for capital investment, employment and sales have continued to tail off. D&B's sales expectations index for the September quarter has dropped to below its 10-year average of 11, pulling back to 9.2 from 13.5 last quarter.

It's this declining forecast that has D&B thinking that while businesses expect the higher prices to dent their sales, there are still signs of an early and tentative desire to move past this trend of perpetual discounting.

Dun & Bradstreet CEO Gareth Jones said that his company's latest research shows 46% of businesses see operational costs as their biggest hindrance to growth. And with cash flow remaining a major issue, about the only way to lift earnings is higher margins.

The report shows that the profit outlook for the third quarter of the year has also picked up a little. D&B's index has risen two points to 16.2, some nine points higher than the 10-year average. The interesting thing is that while almost every measure in the Business Expectations Survey has declined over the past three quarters, profit expectations have remained fairly upbeat.

The difference between earlier this year and now is that the past few quarters saw businesses trying to keep up with the increasing softness by locking down on investments and expenditure and by discounting. However, the latest data "suggest that businesses may now be ready to move out of that mode," said Mr Jones.

Despite the budding optimism and plans to lift prices, help on the ground will be slim. Employment and business spending plans remain in negative territory for the September quarter, with more businesses than not indicating they will cut staff and capital investment further. This tells D&B that hiring conditions will remain difficult, especially given the recent staff reduction announcements from some very big companies like Ford Australia.

The most optimistic sectors are real estate and insurance and transportation, communications and utilities. Combined, both sectors expect to push through significant price increases, with D&B finding expectations levels sitting well above the national averages.

Stephen Koukoulas, an economic advisor to Dun & Bradstreet said the weakening outlook for employment and capital investment indicates that overall growth will probably remain below trend through to the September quarter. Also, falling employment expectations are indicating an increasing risk the unemployment rate could actually hit 5.75% over the next few months.

"The early effects on prices from the recent fall in the Australia dollar appear to be showing up with the rise in expected selling prices, although it must be emphasised that this increase is from a record low level and that any significant lift in inflation remains unlikely."

"The overall tone of the Business Expectations Survey is one that will leave open the possibility of further interest rate cuts in the months ahead as the RBA works to support economic growth in the face of softer global and domestic economic conditions," Mr Koukoulas concluded.