Coronavirus (COVID-19) updates from the Australian Government

Key themes from the Treasury Business Liaison Program - November 2003

Date

The following article is a summary of findings from the Treasury Business Liaison Program conducted in November20031. Treasury greatly appreciates the commitment of time and effort made by the Australian businesses and industry associations that participate in this program2.

Overview

The November business liaison round comprised meetings with contacts in Sydney, Melbourne, Brisbane and the Riverina area, along with a number of phone interviews. Contacts were from a range of industry sectors.

Overall, contacts reported strong business conditions over recent months and were broadly optimistic about the outlook for their businesses and strength of the Australian economy more generally. Nonetheless, some contacts noted risks around the sustainability of the global recovery, the appreciation of the Australian dollar and ongoing effects of the drought.

The focus of most contacts was on continuing to reduce their cost structures and improve their efficiency in order to maintain a competitive edge and improve profitability.

Most contacts noted that their investment intentions remain solid but in some cases would be lower than recent high levels. Employment intentions for most contacts were broadly stable, while cost increases were generally considered manageable despite some contacts noting a slight increase in wage pressures.

General business conditions and outlook

The majority of contacts indicated that in general current conditions were good and that the outlook was positive. In particular, the construction sector was especially vibrant with many contacts surprised by the ongoing strength. Contacts in this sector were working close to capacity and did not expect a drop-off in work in the next 6-12months. Communication sector contacts also indicated that the overall market continues to grow strongly.

The retail sector was expecting solid sales in the lead up to Christmas although as yet they had seen no signs of a ‘break out’ in spending. Expectations for spending next year were broadly in line with the strong growth experienced this year. A number of contacts in the entertainment sector indicated that their turnover was largely independent of the overall level of economic growth but influenced more by longer-term trends, such as demographics and regulatory change.

A number of contacts indicated that they were facing challenges. However, these challenges typically related to industry specific issues — such as industry consolidation, changes in technology and increased competition.

  • For example, the photographic industry faces challenges from the more widespread use of digital technology.

Some export contacts suggested that they had benefited from increased global demand— especially from China — for their products. A number of contacts also indicated that they faced mature markets in Australia and that opportunities for expanding their business increasingly lay overseas. In particular, the importance of the Asian and United States markets was highlighted by several contacts.

  • For example, transport sector growth in Asia was reported to be around 3times as high as in Australia.

According to most contacts, the Reserve Bank of Australia’s recent decision to increase interest rates has had a negligible impact on business activity to date. However, a number of contacts raised concerns about the impact of future increases on the spending of their customers. Exporters were also concerned about the implications of future interest rate rises for the exchange rate.

The key risks identified by contacts included the sustainability of the global recovery, the appreciation of the Australian dollar and the ongoing effects of the drought.

Rural economy

A number of contacts indicated that the rural economy continues to be held back by the lingering effects of the drought. Some regions continue to be affected by poor rain as well as the impact of strong winds and late frosts.

In addition, efforts to replace livestock lost during the drought is taking place against a backdrop of high cattle and sheep prices. A number of contacts indicated that gaining a return on these investments remains highly dependent on getting further rain this year.

Some contacts also noted that the loss of production last year due to the drought had been offset to some extent by higher rural commodity prices. However, this year some prices had fallen, which, combined with continuing low levels of production in some areas, would have a significant impact on some farm incomes.

Contacts in the Murrumbidgee Irrigation Area indicated that although the irrigation water has insulated them from the full effects of the drought, ongoing low rates of general access to water — and dramatic increases in the cost of water — were likely to restrict output of some crops this year. Contacts also indicated that the country surrounding this area remained ‘fragile’ and had not really recovered from the drought.

Aside from drought, the key risk to farm income identified by rural contacts was the exchange rate. This issue is discussed further below.

Competition and costs

A common theme raised by contacts was the increasingly competitive nature of their markets. A number of contacts noted that competition was both domestic and international in origin. In some industries there was also excess capacity which was driving down prices.

Consistent with these competitive pressures, the majority of contacts were currently focusing on containing or reducing costs. A common theme was a reorganisation of supply chain or inventory management practices.

Most contacts suggested that cost pressures were broadly manageable, although some suggested that there was a slight increase in wage pressures. This was most noticeable for those recently signing enterprise agreements covering multiple years, where recent wages increases were higher than those agreed 2-3years earlier. Some contacts also indicated that it was becoming harder to find productivity offsets when negotiating enterprise agreements.

Some contacts suggested that their regulatory costs were increasing. From a reporting and disclosure perspective they typically saw this as a reaction to recent high profile bankruptcies. These costs were especially high for those companies who also report back to the United States, where recent changes to accounting standards have ‘raised the bar considerably’.

Some contacts indicated that increases in freight costs were affecting profitability. Several contacts also noted an increase in security costs both in Australia and overseas— including to meet new regulatory standards in the United States. This was most evident in the transport sector.

Insurance costs generally appear to have stabilised following rapid growth in recent years. However, several contacts raised workers compensation costs as an issue and indicated a preference to self insure as the setting of premiums on an industry wide basis did not accurately reflect their individual level of risk.

Australian dollar

Contacts views on the effects of the appreciation of the Australian dollar were mixed. Those contacts most concerned were typically manufacturing, mining and rural exporters who indicated that the previously low level of the Australian dollar had provided Australia with a competitive edge over international competitors, but that the recent appreciation had eroded this advantage. As a result, countries such as China and SriLanka were now more able to take advantage of their low labour costs to compete effectively in a number of markets.

  • Some contacts suggested that the current level of the dollar is already putting pressure on sales while other contacts indicated that the present level is manag
    eable but that further increases would cause problems.

Offsetting this, importers were expecting to gain from the appreciation of the Australian dollar with suggestions that some businesses were taking advantage of the opportunity to import low cost capital. However, other contacts noted that there was yet to be a flow-through to the prices of certain imported machinery and that such a flow-through typically took some time to eventuate.

A considerable number of contacts indicated that they had a high level of cover against movements in the exchange rate. In a number of cases this reflected the use of natural hedges — for example, many contacts are both importers and exporters while other companies had established operations overseas or negotiated contracts in Australian dollars. Other contacts had purchased cover through the use of derivative products. Some contacts noted, however, that this cover is beginning to run out and that the value of the Australian dollar is beginning to impact on negotiations of new overseas contracts.

Employment and investment

Most contacts indicated that they intended to maintain broadly stable levels of employment over the next year. Several contacts also indicated plans to manage the amount of staff turnover. There were few reports of skill shortages or difficulties in attracting qualified labour.

Investment intentions were generally solid and broadly consistent with longer-term trends. In a number of cases this will mean a reduction from high levels achieved last year following significant expansions and capital upgrades. Several contacts were yet to finalise their investment plans.

1 A detailed explanation of the Treasury Business Liaison Program is provided in the Treasury Spring 2001 Economic Roundup.

2 Summary reports of Treasury’s business liaison reflect the views and opinions of contacts. A summary of business conditions reported by liaison contacts is provided for the information of readers. While Treasury’s evaluation of the economic outlook is informed by findings from business liaison, a much wider range of information and data is utilised to ensure a rigorous assessment of the Australian economy.