Bright signs for credit growth

Business borrowing plans strengthen

01 July 2014

The outlook for commercial borrowing is showing signs of improvement with survey findings that 21 per cent of businesses intend to seek credit to grow during the third quarter of the year, the strongest response since the beginning of 2011.

With interest rates remaining at record lows and the Australian Bureau of Statistics revealing that business lending in April increased by a seasonally-adjusted 5.8 per cent, Dun & Bradstreet's forward-looking Business Expectations Survey suggests that commercial credit activity will improve further.

According to D&B's research, borrowing plans fell sharply in mid-2012 and remained weak for the following 12 months as Australia's economic performance softened and optimism dwindled on the uncertainty of a recovery. In the final quarter of 2013, following the Federal Election, optimism returned and business expectations began a steady improvement, accompanied by a willingness to take on debt.

BEX - Q3 2014 - final chart 1

Coinciding with an improving appetite for finance, capital investment and hiring expectations have lifted in a sign that businesses are anticipating increased activity during the second half of the year.

With 18 per cent of businesses intending to increase their capital spending in Q3 2014, compared to six per cent that plan to pull back investment activity, D&B's capital investment index has lifted to 12.1 points, up from 10.0 points the quarter before and -1.5 points a year earlier.

In addition, the employment expectations index has risen to 12.7 points, from 2.9 points in 2013, as 21 per cent of businesses expect to hire new staff and eight per cent plan to reduce their headcount. The employment index is now at a 10-year high and follows positive job vacancy data from the ABS which showed total vacancies increased by 2.6 percent in the three months to May.

BEX - Q3 2014 - final chart 2

"While sentiment has taken a hit since the release of the Federal Budget, the general outlook for business activity remains well above last year's levels," said Adam Siddique, Head of Group Development-Dun & Bradstreet.

"Significant to the broader economic picture is the continued lift in business investment and employment plans which are being bolstered by a more positive attitude towards accessing new finance.

"Credit is a driving force in the economy and a critical tool for business investment and expansion, making this recent upward trend in borrowing plans particularly encouraging," Mr Siddique added.

As businesses report a greater willingness to borrow and invest, they also identify limited obstacles to expansion. When asked about their biggest barrier to growth in the year ahead, the most common response from businesses was 'no major barrier' (31 per cent). In addition, 64 per cent of respondents have indicated they are more optimistic about growth this year compared to 2013.

While investment and employment indices have extended past quarter gains, business expectations for sales, profits and selling prices have all declined from the previous quarter.

With 43 per cent of respondents anticipating increased sales compared to the 11 per cent expecting a reduction, the sales index is 32.5 points for Q3 2014, down from 33.6 points in the previous quarter although up from the 4.9 points measured a year earlier.

After increasing sharply into the first three months of 2014, the profits index has now declined for two consecutive quarters. D&B's survey has found that 35 per cent of businesses expect higher earnings in the third quarter compared to 15 per cent which forecast a fall, and 50 which anticipate no change. These responses have taken the profits index to 19.9 points for Q3 2014, down from 20.7 points last quarter.

 BEX - Q3 2014 - final chart 3

"Activity in the business sector remains mixed, however, the positive news on borrowing and capital investment intentions points to a degree of optimism, particularly in the non-mining sectors," said Stephen Koukoulas, Economic Advisor to Dun & Bradstreet.

"While the lift in capital expenditure expectations in these areas is encouraging, the current levels do remain below the peaks seen in previous cycles.

"A further uptick in expected employment levels is also encouraging and bodes well for the unemployment rate remaining below six per cent in the current cycle," Mr Koukoulas added.

"After a strong upswing in late 2013 and early 2014, expectations for sales, profits and selling prices have all edged lower, although they remain well above the levels of a year ago.

"Overall, it is a picture where the RBA is likely to extend the period of interest rates on-hold, which, with rates at current record lows, is likely to remain a positive influence for the business sector over the second half of 2014," Mr Koukoulas concluded.

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