A break in the clouds

Tuesday, 01 December 2015


    Results from the Director Sentiment Index for the second half of 2015 indicate that directors are at their most optimistic in two years, but are still eager for change.

    The views of Australia’s directors have come under the microscope again with the release of the Director Sentiment Index (DSI) results for the second half of 2015.

    The results of the index reflect a shift in sentiment across Australian boardrooms. General sentiment has increased to its highest point in two years and there is marked growth in positivity about government impact on consumer confidence and business decision-making.

    Despite lingering concerns about global economic uncertainty, there is increased optimism regarding the general business outlook.

    “Just as director sentiment has increased quickly, we can just as quickly see it fall if the Government does not deliver,” said John Brogden, managing director and CEO at the Australian Institute of Company Directors.

    Indeed, a sharp fall in sentiment has been witnessed in previous years. Following the election of the Abbott Government in late 2013, director sentiment reached its second-highest level. However, this quickly fell in the next period, sparking a notable downward trend over two years.

    “The Federal Government is in a strong position to pursue a reform platform. Directors want reform and they want it urgently,” said Brogden.

    Infrastructure, tax reform and a focus on national industry and innovation policy are listed as the Government’s main priorities and the keys to encouraging innovation and growth in Australia’s transitioning economy.

    It is clear that directors are calling for structural adjustments to be made to the economy. While general sentiment is rising, confidence in the Australian and global economies is still low. Sixty per cent of directors believe the Australian economy is weak and almost 50 per cent expect this to continue over the next 12 months.

    “Directors are increasingly concerned about our international competitiveness and engagement with Asia,” said Brogden.

    “These are important issues that will impact the nation’s future and are additional evidence that Australia needs a bold new policy framework and commitment to innovation if its past prosperity is to be maintained.”

    Here are some highlights from the DSI for the second half of 2015.

    Economic forecast

    Respondents have become more optimistic about the future health of the Australian economy in the past six months; however half still remain pessimistic about the coming year. Sentiment regarding the US and Asian economies has declined since the first half of 2015, while the European economy continues to be regarded very pessimistically.

    Business outlook

    Directors are more positive about the general business outlook and sentiment regarding outlook for their sector reached its highest level since the first half of 2014. Expectations for business growth in the next year have also become increasingly optimistic, despite 35 per cent of directors claiming the growth of their business has weakened in the last six months.

    Leading challenges

    Global economic uncertainty and low productivity growth continue to be the key economic challenges facing Australian businesses, while the ineffective tax system has become the third most significant challenge.

    Priorities for Canberra

    In the short term, directors expect to see tax reform, infrastructure and productivity dealt with by the Government. The Federal Budget deficit, government debt and our ageing population have dropped down the list of priorities. Long-term priorities for the Federal Government include infrastructure, engagement with Asia and productivity growth.

    Tax reform

    In line with the previous index, directors rate the GST as the top priority in any comprehensive review of the tax system. Eighty-two per cent of directors support a change to the GST system, with an increased proportion preferring both an increase in the rate of tax and a broader base.

    There is also increasing concern among the director community about tax rates; 55 per cent believe that corporate tax rates are too high and 75 per cent believe that personal income tax rates are too high.

    Focus on infrastructure

    Infrastructure has remained the top long-term priority for the Federal Government since the second half of 2012. Ninety per cent of directors maintain government spending and investment in infrastructure is too low.

    Red tape

    Despite no change in regulation policy in the past year, directors have become more optimistic regarding the current level of red tape. Almost 35 per cent cite a decrease in levels of regulation in the past 12 months and 25 per cent expect a further decrease in the next 12 months. However, directors still rank red tape and regulation as the second impediment to productivity growth for businesses, following “general economic conditions and concerns.”

    Government impact

    There has been a notable turn-around in perceptions of the Federal Government’s impact on business following an all-time low in the first half of 2015. In six months, government impact on business decision-making has seen a dramatic positive change, jumping 46 points. Similarly, government impact on consumer confidence is perceived to be more positive, jumping 71 points since May.

    Since Malcolm Turnbull took over as Prime Minister, 46 per cent of directors now agree that the Government understands Australian business. Another positive result.

    Risk and the boardroom

    There has been a slight increase in the number of directors who believe there is a risk-averse decision-making culture on Australian boards, with almost 75 per cent of directors believing this to be true.

    Perceptions about the tie between personal liability and cautious decision-making for directors and boards remain the same, with 85 per cent saying the risk of personal liability has made them more cautious.

    Perceptions about the tie between personal liability and cautious decision-making for directors and boards remain the same, with 85 per cent saying the risk of personal liability has made them more cautious.

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