Business conditions for large corporates declines, but remains higher than broader economy

26 July 2011

NAB ASX 300 Business Survey (June 2011) key findings:

  • Business conditions for Australia's larger corporates slowed in Q2 2011 but they remain stronger than the broader economy
  • Business confidence softened in Q2 – weakest sectors were retail, followed by wholesale and manufacturing
  • Demand remains a key constraint on both outputs and profits
  • Large corporates recorded larger cost increases – particularly labour – in Q2, and anticipate strong increases in labour costs over the next quarter
  • ASX 300 anticipate a deterioration in borrowing conditions over the next quarter
  • Increase in capital expenditure with 31% of large corporates reporting an increase

National Australia Bank's (NAB) latest ASX 300 Business Survey has found that Australia's large corporates recorded stronger conditions for the June quarter than the broader economy. However, business conditions for the sector slowed recording +5.8 points compared to +13 points in the March quarter.

Spiro Pappas, Head of Institutional Banking, NAB, said while global uncertainty, low consumer spending and weaker demand is affecting outcomes and confidence levels amongst Australia's large corporates, the results indicate that conditions for larger firms remain stronger than those of the broader economy.

"We're anticipating conditions to improve over the coming quarter as uncertainty surrounding European and US Government debt and our Government's proposed carbon tax begin to resolve," Mr Pappas said.

Business confidence in larger corporates remains marginally weaker than the economy-wide average with ASX 300 firms recording +2.5 points compared to +5.7 points in the March quarter. Overwhelmingly the weakest sector in terms of confidence was retailing, followed by wholesale and manufacturing.

"The results indicate that demand, tighter labour markets and increasing cost pressures is affecting confidence levels," Mr Pappas said.

In terms of conditions, the strongest performing industries in the ASX 300 (excluding mining) were Finance, Business and Property Services (+20 points) and Wholesale (+18 points). Larger corporates who recorded weaker business conditions than their industry peers include manufacturing (-15 compared to -8), construction (-8 points compared with -5) and recreation and tourism (-5 points versus +5).

"As we indicated in the previous survey, the multi-speed nature of our economy is evident, and is expected to persist. By State, confidence remains highest in Western Australia as a result of the mining boom".

In line with deteriorating profitability in the June quarter, sales margins for large corporates were also weaker – with discounting remaining the likely driver.

"The decline in sales margins was particularly evident in the retail sector. Large retailers have become increasingly negative recording confidence level of -28 which reflects higher consumer savings, weak consumer confidence and uncertainty going forward,"

We saw a sharp increase in capital expenditure for larger corporates over the past three months with 31% reporting an increase compared to 10% for the broader economy. Capacity utilisation amongst ASX 300 remained unchanged at 84%.

"As we indicated in the previous survey large corporates are anticipating an increase in capital expenditure despite weaker conditions and confidence. This indicates that while large corporates have a weakened level of confidence this is not having any bearing on capital expenditure plans," Mr Pappas said.

Cost pressures have been an increasing issue for Australian businesses over the past year. The survey recorded larger increases in costs compared to the broader economy, particularly labour costs which rose 0.75% for large firms compared with around 0.45% economy wide.

"Large corporates are anticipating rising costs over the coming three months – particularly for labour at around 1.1% - and are less optimistic about their capacity to pass through these costs in the form of higher prices," Mr Pappas said.

In line with the trends for business conditions, forward orders have marginally declined for large corporates, recording a net balance of +5 points in June, down from +7 points in previous survey.

Reflecting the current softness in orders, stock levels in large corporates softened in the June quarter. With trading conditions and orders tipped to improve over the next three months, stock levels are tipped to decline over this period.

Large corporates reported a stronger cash flow position than the broader economy – reporting a net balance of +20 points, compared with +5.5 points in the broader economy. By industry there is a considerable variability in terms of cash flow – with ASX 300 recording strong expectations in Finance and Wholesale, 45 points and 36 points respectively.

"Whilst the results for large corporates overall are weaker than the previous quarter, larger corporates are navigating through the uncertain business environment relatively well. They have benefited from conservative management of cash and gearing and along with their strong market positions remain well placed for an upturn in the business cycle," Mr Pappas said.

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Elisha Vincent
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