Australian dollar fears grow among SMEs

From today’s Dun and Bradstreet National Business Expectations Survey:

Concern over the consistently high Australian dollar has risen significantly among local businesses, particularly those in retail and manufacturing, according to the latestDun & Bradstreet National Business Expectations Survey.

More than a third of businesses, up nearly 40 per cent on last month, expect the high exchange rate to have a negative impact on their operations in the June quarter.

The survey also finds that while overall sales and profit expectations remain elevated, anticipated employment levels have declined from levels at the start of the year.

According to Dun & Bradstreet CEO, Gareth Jones, businesses continue to remain cautious in response to increasingly conservative consumers and the maintenance of a relatively high local currency.

“This caution amongst businesses is increasingly being seen through a focus on consolidation rather than growth,” Mr Jones said.

“Small businesses in particular appear to be focussed on maintaining profitability and cash flow by improving margins through, for example, parin back operational costs rather than looking to grow operations through greater investment and expansion of their workforce.”

“Clearly, the pressure of a sustained high in the Australian dollar is starting to bite for main street businesses.”

Concern over the dollar grew noticeably among retailers, rising 12 percentage points to reach 37 per cent during February. Retailers also downgraded profit expectations, with more than half anticipating slowing demand in the year ahead.

This comes amid continued gloom over competition from online sellers, with nearly half of all retailers expecting internet competitors will have an adverse effect on their operations.

“Consumers are increasingly savvy and adept at seeking out cheaper alternatives. Businesses need to adapt quickly or risk losing customers overseas,” Mr Jones said.

There’s not much doubt about manufacturing declining at the hands of the high dollar. However, the retail Dutch disease meme is less certain. The recent NAB study of retail trends did not show online purchases as a large issue. An earlier CBA study showed more of a trend, but it was still minor. These are hard evidence studies of credit card activity, not a survey.

The case for retail suffering from Dutch disease, as opposed to the generally weak demand for credit and weak house prices, is not yet made.

Fear Grows Over Aussie Dollar

Houses and Holes

David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal.

He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.

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Comments

  1. Part of the “Dutch Disease” was running persistent current account surpluses. Clearly we are not displaying all the symptoms of this illness. Need to consult another doctor for a second opinion.

      • HnH, the current issue of Foreign Policy is focussed on the evolution of globalisation, subsequent deindustrialisation of many developed economies, growth in industrialisation of developing economies.

        All of this occurring in nations with no natural resources to speak of – ie a by-product of globalisation. This must always be acknowledged as the prime driver, over time, of deindustrialisation in many developed economies, ours included. Yes, the tradable manufacturing sector is currently feeling this more sharply due to the strong currency. Equally there is every likelihood that as the relentless shift to cheaper production rolls on, continued decline in domestic manufacturing would still have occurred. This is a major issue facing all developed economies and indeed, developing economies who are reliant on the continuation of this shift. Worth the read.

        • Do you believe in permanent and ahistoric commodity prices?

          Also, I don’t want to be ad hominem but it would be only fair that you tell us what you do for a living.

          • Also w.r.t. “historic commodities prices” the current levels are only historic if you exclude the history where they are not.

          • MineBot (or should I call you Gina?):

            No-one is saying that de-industralisation hasn’t happened in other advanced economies with few natural resources. But it would be absurd to deny that the strength of the AUD isn’t accelerating the process in Australia.

            So, lets see if you can type the words. Repeat after me: “The strong Australian dollar is accelerating the demise of manufacturing in Australia”.

            I mean, how could it not be so? How do you expect to have any credibility here if you deny the obvious?

          • Lorax, at last you understand. As I have said from the outset, months ago, the strong dollars exacerbates the challenges in the tradable sector. I’ve this consistently. But manufacturing has not been what it once was for decades, the prime catalyst for its demise is international competition – unit cost generally much cheaper overseas, factories move overseas, goodbye manufacturing. Simple really.

            You’re getting there 🙂

          • How many times has it been demonstrated in here…dozens…that the mining industry itself is not the problem.
            The Carry trade underpinned by our willingness to sell our assets cheaply is the cause of the problem.
            Why does this stupid slagging vendetta at anyone involved in mining going on?
            Lorax i’ve seen you contribute nothing else but slagging to this forum.
            As to trying to pin the decline in retail on the ascendance of the mining industry this just shows the depths of stupidity and meanness to which this MB site has deteriorated. It’s been shown by nearly every economist of worth to be caused by previous excess credit resulting in an over-bloated retail and service sector.

            With that I’m out of here! The whole place has reached such a low level of debate and discussion consisting mostly of thoughtless slagging.

  2. One third of businesses cite the high AUD as an impediment (two thirds do not), inclusive of a large percentage rise in retailers also claiming this. As you say, the case has not been definitively made that the currency is a key negative for retailers. Clearly there are a range of other issues.

    Open question:

    How does the high Australian dollar negatively impact the non-tradable business sector.

  3. True, the NAB study showed what it showed, but Gerry Harvey and other retailers were worried enough about Amazon etc to spend money mounting an ill-fated compaign to block it (which was the real goal behind their campaign, not saving Aust jobs). They wouldn’t have done that without reason.

    I can only see what I see, and most people I talk to are doing a considerable amount of direct importing.

    The retail sector ex. food is going to get crunched.

    • Amazon has an advantage at any currency rate since there is no GST, and US retailers generally don’t seem to be able to claw the bejesus out of punters as aussie retailers have done for decades — during both high and low currencies.

      • The GST is only a tiny component. Consider a pair of shoes that cost $150 here and $60 from Amazon. Suppose Mr. Harvey has his way and you add the GST. The choice now is $66 compared to $150. It doesn’t really change the equation much, does it? I think your point about ‘claw the bejesus out of punters’ is the more relevant one.

        • Couldnt agree more. Check out Microsoft.com

          Download only purchase:

          Windows 7 Home Premium Full Australian residents = $299 AU

          Windows 7 Home Premium Full US residents = $199 US

          Storefront cost = $0

          Perhaps i am stuck in a timewarp but im pretty sure AU$ > US$

          This kind of rorting happens all the time. Consumers don’t like being ripped off and why should they? Companies need to adapt or go bust – see (Borders & WOW S&S) as examples.

          I dont see many HMV or Sanity stores around anymore either. Looks like iTunes (a business modelled on what consumers want) made them a little redundant.

          Just so everyone knows – My name isn’t Einstein, even us simpletons can figure it out, why can’t company executives?

          • +1

            we live in a global world and as consumers we are price takers — of whatever and wherever the best price is.

            The Australian monopoly/duopoly/oligopoly model of doing business where you just sit back and gouge the punters without any need to compete or innovate will hopefully go the way of the dinosaurs.

  4. Robert Sherlock

    I purchase make-up for my sister, an item that sells for $18 in Perth retails for $4 in Walmart in Texas. I know Walmart will still be making money on selling it. Get rid of all land zoning, opening hours restrictions and high minimum wages for a start, that will be the only way for Australia retailers to start to compete with Texas. Even with a 50 cent Australian dollar will not solve everything, the lower AUD will cause many of the costs of Australian retailers to go up (Oil/Fuel)

    • US retailers are also hurting. In last weeks Economist they discussed Online vs Traditional HIgh Street presence. One observation at the end was the Walmart whilst announcing a 6% increase in sales volume, it’s GP on that was down by 15%. The really low prices that we are finding in the US are clearly not sustainable. It appears that there is a need for a more sustainable adjustment upwards there as much as an adjustment downwards in Australia. I fear to the detriment of employment levels in retail, that will see job losses and store closures. This will go onto affect retail infrastructure and continue through the investment and economic food chain.

      I agree with DFM that there needs to be some degree of emergency support for Manufacturing as mining is not going to pick up the slack. They are little by little automating their processes. I don’t understand currency trading so I’m not sure what the affects and costs of devaluation would be however something has to be done.

  5. It’s Maslows fault! (and globalisation and multinationals!).

    His hierarchy of needs suggest that people most value basic food and shelter, so the Chinese, Indians etc will work for $5 a day to prepare land for building, to build the factory, shopping centre and infrastructure, to do the transporting, work in the shops and factories build the houses, maintain it all etc.

    In our case recent or current Australian wage levels are in all of these things. It isn’t just the shop assistants wage, it is the wages embedded in everything that that keep prices high, together with the returns expected for new investment.

    Globalisation means that a chinese coming out of absolute poverty is just as valuable as an Australian slipping into relative poverty to a multinational company allocating capital.

    Multinationals are rational socialists in that they will distribute capital, purchases and wages to where they are most “needed” in relative terms if there is reasonable political certainty for the lifetime of the investment/product. They are not racist in capital/wage/purchasing allocation.

    The question to my mind is how do we have a sustainable economy over the long term, maintain generational equity, have a sustainbale future in a world of scarcity, have a secure country, avoid climate change and its impacts, share the work to maintain a reasonably egalitarian society and support our existing citizens even in preference to resident non-citizens who are not refugees. (But this might be an illegal point of view as I am preferring one set of people based on nationality.)

    But others will think a different set of questions are more important.

    • Bobby Fischer

      “The question to my mind is how do we have a sustainable economy over the long term, maintain generational equity, have a sustainbale future in a world of scarcity, have a secure country, avoid climate change and its impacts, share the work to maintain a reasonably egalitarian society and support our existing citizens even in preference to resident non-citizens who are not refugees. (But this might be an illegal point of view as I am preferring one set of people based on nationality.)”

      +1. And I’d add, reform democratic institutions in this country to limit the influence of the 0.1% mega rich (seeing this discussion is in vogue at the moment). E.g. limiting political donations as other kibitzers have mentioned. Eternal vigilance is also constantly required in exposing cozy relationships between the heavy hitters and political parties and performing objective analysis on major reforms and whether they are truly in the national interest (and by extension benefit the majority of Australians, not just the chosen few).

  6. Terry McFadgen

    I’m with Sherlock on this- and there are many similar examples to the makeup one that could be citedOr for a different angle consder what Kindle ebooks are doing to bookstores(R.I.P).The danger is that the currency issue assumes a prominence it doesnt deserve and the more serious villians- restrictive work practices, overtime for turning up,bureaucratic red tape,oligolopies, lack of innovation etc-get forgotten about as we beat the overvaluation subject to death.Get over it.