Company profit expectations have reached their highest level since 2003, with Australian businesses anticipating a jump in takings in the New Year on the back of stronger sales and firming selling prices. Continuing initial positive forecasts for the lead-up to Christmas, Dun & Bradstreet’s Business Expectations Survey shows that 36 per cent of companies expect to increase their earnings during Q1 2014. This response has taken the survey’s profits index to a 10-year high of 34.9 points, up from 21.1 in the previous quarter and 22.9 at the same time last year.
After remaining downbeat through much of 2013, the business outlook appears to have turned a corner, with profit and sales expectations lifting for consecutive quarters while employment and investment intentions have stabilised. The sales expectations index for the first quarter of the New Year has risen to 13.9 points, its highest level in 12-months, with 16 per cent of businesses anticipating increased activity while just two per cent expect weaker trade.
Further supporting healthier profit margins, 18 per cent of businesses plan to raise the prices of their goods and services in Q1 2014, compared to just two per cent that will discount. This result has taken D&B’s selling prices index up to 15.6 points, its highest level since mid-2012. With official figures showing that the underlying rate of inflation increased at an annual rate of 2.8 per cent in the September quarter this year, which was above expectations, policymakers will be watchful for future gains in the selling prices index.
Soaring profits as the cycle turns are not inconceivable. In theory at least the economy should have shed much of its excess capacity as demand has wavered this year leaving business lean for any rebound. I’m not sure how lean we are this time because it’s not been a deep recession but a slow bleed with much hope of a turnaround throughout. Still it’s possible.
Where the rubber hits the road is in the two most subdued measures. Investment and employment ultimately determine demand so they must rise or any profits bounce will be ephemeral.
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.
