Bright outlook for business profits

December quarter forecasts edge 10-year high

2 September 2014

Business earnings are expected to return to pre-GFC highs during the final three months of this year on the back of sustained levels of optimism and healthy sales forecasts, with retailers particularly upbeat about increasing their profits.

According to Dun & Bradstreet's latest Business Expectations Survey, the profits expectations index has lifted to 29.1 points, up from 19.9 in the last quarter and 21.1 last year. With 40 per cent of businesses anticipating higher profits during Q4 2014, compared to 11 per cent that expect a weaker return and 49 per cent that anticipate flat results, the index is now edging its 10-year high of 29.7 points.

After diverging from forecasts over the past 12 months, actual profits reported by businesses for the past quarter have begun to trail expectations, with the actual index for Q2 profits rising to 6.03 points.

Q4 2014 interim - chart 1

Retailers appear to be banking on strong Christmas trading this year, with the sector lifting its expectations for higher profits to 20.3 points, up from just 1.3 last quarter and 8.7 last year. Thirty-six per cent of retailers are expecting to increase their takings during Q4 2014, while 16 per cent are forecasting a decline in earnings.

According to Gareth Jones, CEO of Dun & Bradstreet-Australia and New Zealand, the latest survey results highlight a resilience in the business sector's outlook.

"Over the past 12 months, the majority of businesses have been reporting greater levels of optimism about the current business environment compared to 2013," said Mr Jones.

"This view has now been carried through to the end of 2014, with 68 per cent of businesses more confident about growing their operations in the fourth quarter, while sales and profits expectations have also jumped.

"Despite the general improvement, however, it is clear that the economy is delivering a mixed performance and that some sectors expect further headwinds," Mr Jones added.

Driving the overall increase in the profits outlook are the retail; wholesale; services; and finance, insurance and real estate sectors, which have all lifted their fourth quarter expectations. Compared to the same period in 2013, however, fewer companies in manufacturing; construction; transportation, communications and utilities are anticipating higher profits.

Q4 2014 interim - chart 2

In addition to increased earnings, D&B has found that more firms expect to sell more products, hire more staff and raise the level of their capital spending. Compared to last year, both sales and hiring plans have moved to an 11-year high, while the investment index has recorded its most positive response since 2010.

Leading the forecasts for greater sales activity are retailers and services companies. Forty-seven per cent of retailers and 56 per cent of the services sector expect to lift their sales performance during the next quarter, while just 11 and six per cent respectively anticipate reduced trade.

After rising steeply during the beginning of 2014 and raising concerns about the potential for inflationary pressures, D&B's selling price index has eased for a second consecutive quarter. One-in-four businesses now intend to lift their prices during the fourth quarter of the year, while the majority (67 per cent) intend to leave selling prices unchanged.

Q4 2014 interim - chart 3

According to Stephen Koukoulas, Economic Adviser to Dun & Bradstreet, the lift in business sector activity has accelerated.

"Not only are expected sales at an 11-year high; a sign of buoyant activity, but expected profits are at a level well above the long run average," Mr Koukoulas said.

"In the past, firms have only held this level of optimism when the underlying economic conditions were strong," he noted.

"D&B's data suggest that the economy is poised to run at - or even above - trend levels in the second half of 2014, with expected employment and capital expenditure also well above the long run average.

"Encouragingly for the economy's progress, expected selling prices continue to moderate, which indicates that inflation pressures are very well contained. A low inflation climate will be vital for the Reserve Bank of Australia to keep its interest rate settings on hold," Mr Koukoulas noted.

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