Directors Views Cover Story The economy

Trouble in store for the SMEs; Go for long-term capital appreciation; Time to learn from their mistakes; Petrol price backdown created a loss of confidence; Recession will be short and sharp; Exports remain a positive factor.

Trouble in store for the SMEs by John McLauchlan

The economy relies significantly on small business. SMEs ability to influence government (federal or state) is limited. Lobby groups receive little attention because generally SMEs are a diverse group of businesses without critical mass. It appears that votes need to be lost before the Government reacts to small business needs. The introduction of GST and the BAS has placed a significant administrative and cash flow burden on small business. The accounting profession reeling from administrative changes and shortage of staff have had to make a value judgment as to which of their clients receive priority. The net result is a significant increase in costs for SMEs, not only to understand the requirements of the BAS and meet compliance requirements, but also to meet the cash flow requirements resulting from altering the timing of payment. The Federal Government spent too much money on trying to explain and justify the new tax system but did not consider adequately the impact on cash flow for small business. Small business will be significantly impacted by a recession. The slowdown over the Olympic period and since has hit cash flows. Inevitably this will work through to a reduction of staff levels and investment for those businesses able to trade through. Coupled with the last quarter BAS and a much tighter credit policy being adopted by larger suppliers it is inevitable there will be casualties some time this year.

The printing industry is a good barometer of business sentiment and there is little doubt that a slowdown is being experienced. Non-essential expenditure is being deferred and price is again the main criteria being used to award work to suppliers. This means we have had to shelve plans for expansion and have had to increase our focus on cost and cash flow. As a small business that has always survived without any form of overdraft facility, we believe if there is a recession it is only a matter of time before the impact will force us to reduce staff levels and defer investment in technology to survive. It is a sorry state to be in because my underlying confidence in the economy is high and I believe that there are many benefits to be had from the Government's tax strategy particularly in financial management. The bottom line is that many SMEs are or will be in trouble this year unless we avoid a recession.

Go for long-term capital appreciation by Cathy Walter

Negative growth in the December 2001 quarter is neither a portent of inevitable recession, nor indeed a necessary predictor of the performance of the Australian economy over the next year. Emerging data supports a conclusion that the December quarter's results may prove to be an aberration. Domestically, there are early signals that the economy is recovering from a downturn caused by a slump in construction industry activity, largely resulting from bring forward effects of the GST and the Olympic Games. The domestic risk is that consumer and business confidence may be affected by negative perceptions of the economy which are not based on reality. More significantly, continuing downturn in the United States, exacerbated by ongoing weakness in Japan, may affect Australian exports and capital expenditure. The decline in the exchange rate (without any significant inflationary effects) should lessen the consequences of any international downturn by increasing Australia's competitiveness. This background, reflected in lower equities prices and lower prospective interest rates, indicates that selective purchase of internationally oriented growth stocks, for long-term capital appreciation, may be warranted.

Time to learn from their mistakes by Martin Kriewaldt

Whether Australia is in technical recession or narrowly avoids it is a moot point, and, apart from political bragging rights, not of great relevance. Business has known things have been tough since the Opening Ceremony. For business, the burning issues are how long it will last and whether those who guide the economy will learn from their mistakes. External forces have battered business and consumer confidence but the locally inflicted blows have been significant too. How the Tax Office/Treasury thought they could pull forward half a year's tax payments without draining working capital and choking growth is yet to be explained. Complicating the GST "receipts less payments" with BAS demonstrates a lack of understanding of a large part of business. The time taken for business' pain to be felt in Canberra is the disturbing feature of this economic setback. The steps being taken now should have been taken in September/October 2000. More are needed. Thankfully the spectre of elections has caused the politicians to hear, even if the bureaucracy is still deaf.

Today's economy is better than the last six months' but it still needs more business and consumer confidence to resume its course to a "beautiful set of numbers".

Petrol price backdown created a loss of confidence by Nick Begakis

From the suppliers and customers our company deals with, there is no doubt in my mind that owners and/or directors of small to medium-sized businesses have lost confidence in the economy and in the Federal Government over the past few months. The new tax system was meant to be simple but is complex and costly in the minds of many. It appears the Government has improved its cash flow at the expense of business. Many businesses are facing a serious cash flow crisis because they did not separate GST income from business revenue. Many have been forced to absorb the GST for fear of repercussions from the ACCC if they increase prices. Most are stretching paying their accounts, which has a domino effect. However, one upside of the GST and the BAS is that businesses have been able to review their activities much more regularly and become more professional in their accounting practices. The Government has a job ahead to restore business confidence, something that is always fragile. At the moment, negative consumer sentiment is having a marked downward effect on all businesses.

The fact that small business directors/owners saw the Government backdown on petrol prices has also created a loss of confidence. The reduction of the petrol levy had zero effect on the economic lives of consumers and businesses. The real effect was that business saw a government all too ready to change policies in the face of criticism. Now it appears every other lobby group is out to push their special interest case leaving business wondering where it will all end. Business owners and directors still see the basic economic fundamentals as looking good. Australia is experiencing a downturn but probably not a recession. With the Budget next month, the Government has to attend to the basics, stick to good economic policy. "Pork barrelling" exercises or perceived policy weakness will only contribute to a view that they are not good economic managers both locally and internationally.

Recession will be short and sharp by Terry Budge

Australia is currently facing its biggest economic threat since the recession of the early 1990s, as it grapples with the breathtaking speed of the deterioration in the US economy and rising oil prices. The downturn we have witnessed in the housing market has certainly captured the attention of the media, which landed it with all of the blame for the contraction in GDP in the December quarter. Business sentiment is fragile at the moment, so it is unrealistic to expect investment to trigger a rebound in the national economy in the first half of the 2001 calendar year. The exceptionally competitive Australian dollar and falling long-term interest rates will certainly assist business investment, but they will count for little if Australia's export markets are damaged by any overspill to Asia from the slowing of the US economy. Although further major instability in global economic and financial markets represents the major real risk to the resource projects that are likely to commence the construction phase in the second half of this year, our own people on the ground closer to industry are detecting, if anything, an increase in requests to gear up for work associated with the long-awaited resources rebound. Accordingly, I remain cautiously optimistic that even if Australia does slide into "technical" recession this year, it will be short and sharp rather than deep or prolonged, particularly as the kick start from lower interest rates and a very competitive currency gathers momentum.

Exports remain a positive factor by Bill Shields

Looking to the outlook for this year, even with slowing global demand, exports should continue to contribute positively to growth. Our research shows that a 1 percent reduction in growth in Australia's major trading partners (including the US) lowers export growth by about 2 percent. Given the recent downgrading of forecasts for growth in Australia's trading partners in 2001, the negative impact on GDP should be only about half a percentage point. Moreover, the decline in the A$ has provided a competitive boost which should continue to benefit exports through this year. But there clearly are increased risks in regard to the strength of domestic demand, which will be the key to overall growth in Australia in 2001. By contrast, spending on new plant and equipment remains at a high level – although spending on new plant and equipment fell in the December quarter, it has risen by 11 percent over the past year. The latest survey of new capital spending is for a modest expansion in new investment, which we believe should gather pace through the coming year.

Spending by households will be the major influence on overall growth in 2001. Despite weaker confidence recently, there are several important influences likely to support consumer demand through 2001:

• wages should expand by around 3.5 percent (after allowing for slower growth in employment), well in excess of the rate of inflation;

• household disposable income has received a boost from the income tax cuts associated with the GST. Moreover, the tax cuts (and increased welfare payments) were based on a GST impact on consumer prices well above what actually occurred (around 3 percent compared with an official estimate of a 3.75 percent rise in the CPI);

• The negative impact on households from weaker stock prices – the so-called wealth effect – is unlikely to be as strong as in the US, reflecting the larger role of "high tech" stocks (as well as the greater weight of housing in the total assets of Australian households).

While there clearly will be competing demands on household income (higher petrol prices being the most recent example), the continued expansion in household disposable income this year should be sufficient to support further growth in spending – albeit at a slower rate than last year. On balance, growth of around 2.5 percent in household consumption should result in a similar rate of growth in GDP.

A final, and critical influence on the economic outlook for this year will be the stance of monetary policy. With last year's fears of accelerating inflation having abated, it is very likely that central banks will maintain a pro-growth stance and lower official interest rates further. This can be expected to have a positive impact on confidence, and economic activity in the second half of the year, particularly if the full extent of last year's interest rate increases are unwound.

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