The Australian Industry Group 2018 Business Prospects report released reveals that Australian CEOs are optimistic about the year ahead and keen to build on the stronger conditions experienced in 2017.
Ai Group Chief Executive, Innes Willox, said:
“Investment plans and expectations of employment growth are higher than at any time since 2012. If these plans and expectations are realised, 2018 would prove to be a defining year for the Australian economy.
“The renewed optimism from CEOs is built on 2017 delivering much stronger than anticipated general business conditions than they were in the previous year.
“Looking to the year ahead, CEO’s expect general business conditions, turnover, employment growth and gross margins to be all higher than at any time in the past five years.
“If these positive expectations can be turned into reality we would see strong business investment and spending on training, R&D and technologies reaching post-GFC highs. And most importantly, we would see a year in which employment growth equalled or even exceeded the record jobs growth experienced in 2017.
“While manufacturing, services and construction CEOs have a generally positive outlook there are notes of caution. A tellingly high 85 per cent of manufacturers expect a further increase in energy prices. Competition from overseas and online businesses also ranked highly as a primary concern for manufacturers.
“Services sector businesses consider a lack of customer demand to be the largest impediment to growth in 2018, with almost half (49 per cent) of services CEOs identifying it as their main concern. This was up from 29 per cent of CEOs in 2017.
“For Construction CEOs, energy was also a highly negative issue as was a lack of customer demand. Flexibility of industrial relations in 2018 was a primary concern for 19 per cent of construction respondents, a substantial increase from 3 per cent in 2017 and 4 per cent in 2016.
“Overall, given the strength of CEO expectations on employment, Australia could add more than 400,000 new jobs in 2018. An achievement of this magnitude would make critical inroads into both the rate of unemployment and the naggingly high rate of underemployment.
“We should not take these expectations for granted and they need to be underpinned by key policy measures and directions to lift the chances of success. These include:
- Effective policy measures to stem and reverse the rise in energy prices. Expectations of high energy price rises are a clear negative for Australian CEOs.
- The continuation of moderate wages growth. The record jobs growth of 2017 and the ability to meet expectations of still higher jobs growth in 2018 are closely associated with the moderate wages outcomes of recent years and require the continuation of this pattern into 2018.
- The enacting of proposals to make Australia’s business tax system more competitive by lowering the company tax rate to 25 per cent would significantly strengthen the incentives to invest and reinvest in the domestic economy.
“We are on the cusp of a year in which businesses are looking to invest heavily in capital equipment, in technology, in R&D and in staff training. And we are on the cusp of a second consecutive year of record employment growth. If wage outcomes continue to be moderate; if progress can be made on reducing energy costs; and if the proposal to improve the competitiveness of our business tax system are enacted, 2018 could well be a stellar year,” Mr Willox said.
Ai Group’s annual survey of Australian CEOs’ was conducted in October and November 2017. CEOs across the economy were asked about business experiences in 2017 and expectations for 2018. Responses were received from the CEOs of 269 businesses from across all Australian states and all non-farm private-sector industries. The report provides detailed findings particularly focused on Manufacturing, Construction and Services industries. In the latest Business Prospects survey:
- General business conditions are expected to pick up in 2018 for more businesses than in any of the previous five years. Across all businesses, 42.3 per cent of CEOs expect an improvement, 15.7 per cent expect deteriorating conditions (+26.7 per cent net balance) and 42.0 per cent expect no change in conditions.
- Sales are expected to increase for 67.3 per cent of businesses in 2018, with 19.7 per cent expecting no change from 2017 levels and 13.0 per cent expecting a decline in sales in 2018. This reflects clearly better sales growth than was expected in 2017. When asked one year earlier (in Ai Group’s CEO survey conducted in November 2016), 51.0 per cent of CEOs had expected higher sales revenue in 2017.
- Employment is expected to increase in the majority (57.6 per cent) of businesses in 2018. This is the first time in at least five years that a majority of businesses has planned to employ more people. With 12.6 per cent of businesses planning to shed staff in 2018, a ‘net balance’ of 45.0 per cent of CEOs plan to increase employment this year. This is around double the next best net balance for expected employment growth from the previous five years.
- This expectation of strong employment growth appears to be closely associated with an expectation of a continuation of the moderate wage rises experienced over the past couple of years. Wages pressure is identified by only 4.6 per cent of respondents as their leading concern heading into 2018. This is sharply lower than in 2017 and below the levels reported in the previous four surveys.
- Although the majority (67.3 per cent) of CEOs expect their total turnover to grow in 2018, gross profit margins are expected to grow in only 41.0 per cent of businesses in 2018. 13.0 per cent of CEOs are expecting deteriorating margins and 46.1 per cent expect no change (giving a net balance of 27.9 per cent). The low expectations of margin growth relative to expectations of sales growth are related to expectations of rising input prices and especially rising energy prices for the majority of businesses.
- This year’s survey indicates that the large majority of CEOs plan to maintain or increase their spending on various types of business investment including staff training (with 50.1 per cent of businesses planning to increase this in 2018); spending on new technologies (with 48.3 per cent of businesses planning to increase their spending); R&D expenditure (26.0 per cent of businesses plan to expand R&D spending); and physical investment (with 36.5 per cent planning to lift physical capital expenditure in 2018).
- MANUFACTURING: Manufacturing CEOs expect a continuation of the favourable business conditions experienced in 2017. For this year, 48 per cent expect business conditions to improve, while 20 per cent expect a deterioration (+28 per cent net balance). 67 per cent of manufacturing CEOs expect an increase in their own sales turnover and 51 per cent expect an improvement in their gross profit margins in 2018, while 13 per cent expect a decline in sales (+54 per cent net balance) and 22 per cent expect a decline in profitability (+29 per cent net balance).
- SERVICES: Services sector CEOs expect a continuation of the improved business conditions experienced in 2017. Heading into 2018, 40 per cent of CEOs expect general business conditions to improve, while 17 per cent expect a deterioration (+23 per cent net balance). This is more optimistic than a year earlier. Encouragingly, the majority of service industry CEOs expect an increase in turnover (+65 per cent) and employment (56 per cent) as a result of an increase in activity.
- CONSTRUCTION: Construction CEOs are optimistic about 2018 although rising energy prices and input costs remain a concern. An encouraging 84 per cent of construction CEOs expect their sales turnover to increase in 2018 and 55 per cent expect an improvement in business conditions. Employment is expected to increase for most construction businesses, with 74 per cent of CEOs indicating they expect to increase employment in 2018. Energy prices are expected to continue to rise in 2018, with 80 per cent of construction CEOs expecting energy prices to rise and 20 per cent expecting no change. It appears, that many but not all expect to be able to pass on these costs, with 71 per cent of CEOs expecting to increase their selling prices and 29 per cent expecting no change. The majority of CEOs (59 per cent) expect input prices to rise, 38 per cent expect no change and 3 per cent expect declining input prices.
To read the full report – click here