Business fears the pain that’s to come

CORPORATE Australia has watched its “fat” – built up during a decade of growth – slip away, with profits falling faster than any time since 1991.

New results from the Australian Bureau of Statistics indicate that gross profits are down 5.8 per cent for the year ending September 30.

But businesses are expecting the worse is yet to come.

The Westpac ACCI Survey of Industrial Trends shows a continued downturn in business confidence – despite a strengthening in business activity.

“It is likely that this pessimism is not simply an emotional reaction to the US recession but also reflects trends which respondents may be starting to see in their own business,” Westpac general manager economics Bill Evans said.

“As such, the survey is consistent with a slowing activity in the new year.”

While much has been riding on the building industry to help Australia through the downturn, those involved in the sector are less hopeful.

Businesses associated with construction (cement, bricks, fabricated metal products, pipes and tubes) showed the sharpest turnaround in confidence of any sector in the past three months.

“This may be some evidence of the expected downturn in housing activity, which is likely to be very clear by mid next year,” Mr Evans said.

Mining profits already have slumped 13 per cent during the year, while construction declined 15 per cent and business services contracted 60 per cent.

The annual fall came as a result of a 6.2 per cent decline in gross profits in the September quarter, which wiped away the solid 7.1 per cent rise in profits in the June quarter.

The tight trading conditions already have resulted in casualties, as reflected in bankruptcy figures released by Dun & Bradstreet. In 2000-01, WA bankruptcies rose 7.6 per cent to 2,372.

Between July and September a further 618 people and businesses declared themselves bankrupt. Personal bankruptcies rose 30 per cent over the past 12 months.

The pessimism is already drifting through to tighter business spending.

Commercial car sales fell 2.9 per cent in October, albeit after four consecutive monthly gains, including a 12 per cent jump in July when the Government abolished the phase-in of input tax credits for business-related motor vehicle purchases.

Business credit also continued to slip, with annual credit growth the weakest since 1994, growing just 2.4 per cent in annual terms while slipping 0.4 per cent in October.

Westpac economist Justin McCarthy said the weak credit growth was due in part to corporations having a greater preference for obtaining finance by issuing debt securities, as opposed to lending from financial markets.

Despite the current pessimism, Westpac still believes that, given the buoyancy of the domestic economy with regard to the global economic situation, companies and industries largely focused on domestic markets will outperform those deriving a large part of their income offshore.

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