3 November 2011
Business conditions for ASX 300 declined in Q3, however expectations cash flow positions stronger than broader economy
- Business conditions for Australia’s large corporates slowed in Q3 to +3 points – down from +6 points in June compared to -0.3 points for broader economy.
- By industry, there remains a wide disparity in conditions at both sector and state level
- Australia’s large corporates recorded stronger cash flow positions and capital expenditure, with the latter set to outpace the economy average over the next 12 months.
- Labour cost increases are significant, with ASX 300 reporting a limited capacity to pass through costs.
National Australia Bank’s (NAB) Quarterly ASX 300 Business Survey found that business conditions for Australia’s large corporates continued to decline for the September quarter; however expectations for business conditions over the coming 12 months remain higher among the ASX 300 than the broader economy.
Spiro Pappas, Head of Institutional Banking, NAB, commented that while economic uncertainty continues to affect many of Australia’s large corporates, he is anticipating conditions to improve over the coming quarter and he believes that corporates hold the key to recovery for the broader economy.
“We’re reaching an inflection point amongst Australia’s corporates and expect to see an improvement in confidence over the coming quarter as businesses prepare to invest for the future, which is a very encouraging sign,” Mr Pappas said.
Capital expenditure in the ASX 300 continues to outperform the QBS, with 21 per cent of ASX 300 reporting an increase in expenditure in Q3, well above the 10 per cent recorded in broader economy. Larger firms are tipped to maintain this trend over the next year.
“The levels of capital expenditure show that while businesses have faced some significant headwinds over the past year when confidence returns we will start to see greater investment in existing projects, new projects and transformational opportunities amongst Australia’s large corporates,” Mr Pappas said.
Business conditions for large corporates declined to a net balance of +3 points in September, down from +6 points in Q2. In comparison, conditions in NAB’s Quarterly Business Survey (QBS) were largely unchanged during the same period, at -0.3 points (on a non-seasonally adjusted basis).
The survey highlighted the continued multi-speed nature of Australia’s economy with a substantial divergence in business conditions between industry sectors.
“The results are backing up the multi-speed nature of the economy and highlight the disparity within industry sectors,” Mr Pappas said.
Mining remains particularly strong at +60 points, while manufacturing is the weakest at -22 points. Manufacturing was the key driver of weakening business conditions – excluding manufacturing, ASX 300 business conditions were essentially unchanged in Q3 at +10 points
The level of confidence for large corporates remains weaker than the broader economy. The strongest levels of confidence were recorded in the transport, utilities and communications sector at +12 points along with mining at +10 points.
Australia’s large corporates recorded stronger cash flow positions than the broader economy in Q3, recording a net balance of +31 points compared with +6.2 points in the QBS.
“Overall larger corporates are navigating through the uncertainty relatively well and have benefited from conservative management of cash and gearing and remain well placed for an upturn in the business cycle,” Mr Pappas said.
Large corporates expect a considerable deterioration in borrowing environment over the next quarter. Around 41 per cent of ASX 300 firms reported no borrowing requirements, a level similar to the broader economy.
Over the coming three months corporates expect an improvement in sales margins and volumes, improving profit prospects.
“Pleasingly profitability expectations improved noticeably and trading conditions were broadly unchanged, however large corporates anticipate employment conditions to remain weak in the next 12 months,” Mr Pappas said.
There remains a noticeable divergence in forward orders between ASX 300 and the broader economy. Forward orders for ASX 300 improved modestly in the September quarter recording a net balance of +6 points in comparison to -1 in broader economy. Expectations are positive, with ASX 300 firms anticipating an increase in forward orders at +11 points.
“Around 60 per cent of ASX 300 noted sales and orders as key constraint to output, with over 46 per cent nominating demand as the main constraint on profitability. More generally the survey highlights that large coporates remain focussed on as revenue growth projects are uncertain,” Mr Pappas said.
Respondents noted substantial labour cost increases during Q3, at around +1.1 per cent and +0.9 per cent in the QBS and ASX 300 respectively. The results highlighted a limited capacity to pass through costs in the form of higher product prices (rising by just +0.1 per cent for larger firms).
Over the next quarter, cost pressures are tipped to remain – albeit somewhat more modest when compared to Q3 – with anticipated growth in final prices remaining subdued – just +0.3 per cent in the QBS and no change among ASX 300 firms.
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