Are your sales efforts aimed at the right sectors? As the Australian economy hurtles towards recession, veteran business watcher and IBISWorld founder PHIL RUTHVEN nominates the industries that will be hardest hit – and the sectors that should hold up.
As bad news floods the financial pages of newspapers worldwide, the Australian economy continues to experience a slow and controlled decline.
Unlike consumers in the US, Australians have not stopped spending and their net wealth has only taken a minor hit. This has made a substantial difference to the economy's bottom line and has kept growth above water.
Australia is likely to escape a recession, but only just. IBISWorld is expecting two quarters of negative growth - the third quarter of 2008-09 and the first quarter of 2009-10 - but they will not be consecutive. So although unemployment will increase and consumer sentiment will plummet, Australia is not expected to be in recession.
The Federal Government is largely responsible for this, spending its way out of trouble. The two stimulus packages will help boost consumer spending and investment in the economy - the two wheels of the economic growth engine.
The housing market, which has seen some tough times recently, will be the first to feel the recovery in the December quarter of 2009. Consumer sentiment and business investment will follow, pushing the economy back on a growth path by the end of 2010-11.
Some industries will thrive in the current economic climate - but they are a small minority. Only 4% of the 479 Australian industries IBISWorld analyses will benefit from these conditions, while the downturn spells disaster for 5% of industries.
Here is our list of the biggest winners and losers:
FINANCE - AVOID
The Australian finance and insurance sector will need to remain flexible in the face of falling profitability. Industry exits and consolidation are expected to continue as foreign firms pull out or downsize activities and the larger domestic players look for merger and acquisition opportunities.
The sharemarket will remain depressed as corporate profits shrink. Interest income and bond yields will continue to decline, with the RBA projected to cut rates further. The softening property market means there are few (if any) places to earn investment returns in the near-term.
The weak investment environment will deal more blows to superannuation funds while insurers will also face declining premium income as well as poor investment returns.
Banks and other loan providers are bracing for a tough year as domestic headwinds add to wider global problems. The weak property market and mass erosion of household wealth are depressing demand for new mortgages.
Although the finance sector is benefiting from an upswing in mortgage refinancing, this tailwind will run out of puff in the near-term. Lenders will need to carefully manage their loan books, with wealth erosion and expanding unemployment representing significant downside risks to profitability.
RESOURCES - DISASTER
The coming year will see much tighter conditions for the Australian mining sector, with revenue expected to fall sharply from the record highs achieved in 2008. The prices of Australia's major mineral exports, coal and iron ore, are expected to tumble by up to 60% in the coming contract year (1 April to 30 March).
In early 2008, miners were in a very strong bargaining position and cut deals accordingly; high grade coking coal prices tripled and iron ore prices rose by about 85%. Although the much weaker Australian dollar provides a buffer against falling prices in 2009, revenue will shrink.
Volumes will also come under pressure. Miners are either slashing output or selling surplus-to-contract production at much lower prices on the spot market.
A December 2008 forecast by ABARE, the Federal Government's commodities forecaster, downgraded forecast earnings from Australia's commodity exports by around 10% in 2008-09.
Major player BHP Billiton has shelved proposed aluminium, coal and nickel projects, and recently announced a halving of net profit and the closure of a $2 billion nickel mine in Western Australia. Rio Tinto is slashing output and spending worldwide, selling a stake in key Australian mineral assets to its Chinese customers and looking to off-load assets as it tackles the debts from its 2007 acquisition of Alcan.
Global steel production had fallen by 35% in the past six months and, more notably, order books of major steel producers have decreased by 50%. The slowing growth in the previously unstoppable Chinese economy is causing deep concern to Australian miners. Low commodity prices will play a central role in dragging Australia's terms of trade down in 2009.
TRANSPORT - WEAKER
The Australian transport sector is battling another year of difficult conditions as freight volumes contract across the board. Demand for transport services from the manufacturing and retail sectors is declining as manufacturing output falls and Australians tighten discretionary spending.
Conditions will begin to improve in the second quarter of 2009-10 as consumers begin to loosen the purse strings. However, a forecast decline in the volume of resource exports will lead to a decline in freight rail revenue through 2009-10.
On a positive note, the global economic turmoil has seen the price of oil tumble from record highs in July 2008. Falling fuel prices will help protect industry profits. The average trucking company's expenditure on fuel has dropped from around 45% of revenue in mid 2008 to approximately 28% of revenue in early 2009.
Public transport will benefit from weaker consumer sentiment as commuters seek cheaper transport. Poor tourist numbers and fewer business travellers will stifle growth in the number of airline, taxi, and long distance bus passengers.
IT & TELECOMMUNICATIONS - THREATS AND OPPORTUNITIES
The tight funding environment and weakening economy are weighing on capital expenditure. Many businesses will defer investment in IT as a means to cut costs and improve short-term profitability. This will hurt IT-related industries, with manufacturers and retailers being most exposed.
Telecommunications and internet related services have become an essential part of daily life for both consumers and businesses. So demand for these services will remain relatively robust, despite the downturn. However providers will find it challenging to up-sell clients to higher usage and better serviced plans. This will intensify competition and place pressure on pricing.
The major winners in this environment will be the mobile network operators. These companies will benefit from the migration of wired to wireless services as consumers look to rationalise their services. The rapid improvement in wireless network speeds will see mobile telcos claim a larger share of internet service provision.
Resellers will struggle as price erosion will put margins under additional pressure, which may see these operators become acquisition targets should their capital position deteriorate.
MANUFACTURING - AVOID
The manufacturing sector has not been a shining light in the economy for quite a long time, and the downturn will only serve to exacerbate its troubles. Industries that rely heavily on business investment will suffer the most.
Tightening credit lines and poor operating conditions will severely limit investment from the private sector. Machinery manufacturers will be among the worst off as businesses will not be replacing equipment during the downturn unless it is absolutely necessary.
Highly discretionary industries will also suffer. The already struggling car industry will face tough times ahead, as consumers will postpone vehicle purchases; sales are expected to fall 14% in 2009 to 870,000. Industries that manufacture high-end consumer products (for example, electronics) will also feel the brunt of reticent consumer spending.
The silver lining for manufacturers will come in the form of an expected depreciation of the Australian dollar. Domestically manufactured products will be more price-competitive on the global market, which could spur growth in Australia and abroad.
However export potential will be severely limited by the worsening economies of Australia's major trading partners. The only manufacturing industries to escape fairly unscathed will be those that are not highly sensitive to income levels (such as food and beverages).
Most of the manufacturing sector will be in trouble - the only exception being those producing staple products.
RETAIL - WEAKER
Australian retail sales held up well around Christmas thanks largely to the Federal Government's $10.4 billion handout. But make no mistake, a deteriorating labour market and high levels of consumer debt will ensure that a large part of any further handouts will be saved instead of spent. This means that retail sales are headed down.
Even after taking into account the Government's second stimulus package, IBISWorld estimates that the effect on consumption will only just be enough to stave off recession rather than provide any meaningful and sustainable boost to retail sales.
The areas that will be hardest hit will be those tied to discretionary spending, such as car retailing, jewellery retailing, furniture retailing and department stores.
In contrast, supermarket retailing, used goods retailing and household equipment repair services will hold up well, outperforming relative to the sector. The retail sector will begin to recover during 2009-10, with real growth of 4% expected.
BUSINESS SERVICES - MIXED BAG
Business service providers - consultants, marketers, accountants and legal advisers - are, in many cases, protected against severe downturn. When times are tough, firms may be inclined to employ advisers to help implement cost-saving processes in order to protect profits, or bring in marketers to boost sales.
However, this protection only goes so far, and while the sector will still display growth, it will be muted in comparison to the strong performance of recent years.
Business sentiment is falling rapidly in 2009, and any excess spending is being cut from tightening budgets. Business investment is expected to stay negative until the second half of 2010, and any service not viewed as mandatory is at risk of removal.
A serious threat to the sector is the cancellation of major contracts by large clients during the end of 2008-09 and well into 2009-10. Even the deferral of these contracts can punch large holes in revenue and cause substantial cutbacks. The uncertainty facing the global financial sector is also of great concern, as the financial sector is home to a large number of major clients.
However, as consumer sentiment and private consumption grow towards the end of 2009-10, a strong recovery is expected, as companies look to reposition themselves to take advantage of a surging domestic and global economy.
CONSTRUCTION AND PROPERTY - MIXED BAG
The outlook for construction and property in 2009 is mixed. With private and commercial capital expenditure expected to drop substantially, both residential and commercial property and construction will be severely strained.
The first home owners' grant will offset some of the decline, and lower interest rates will help make mortgages more affordable, but rising unemployment will be the key factor putting downward pressure on house prices.
Many Australians will postpone house purchases in 2009, due to increased economic uncertainty and a housing market yet to reach its nadir. Others will simply be unable to afford houses. This will see the value and number of residential transactions fall and it will keep operating conditions for real estate agents tough. However, landlords will benefit from low rental vacancy rates and rising residential rental prices.
The second half of 2009 may see a minor recovery in the housing market as the Government handouts take effect, although this is still likely to be limited by strong debt levels, credit availability and poor housing affordability.
Winners will include industries aligned with, and exposed to, infrastructure, with the Federal Government's stimulus package expected to create some opportunities. However, despite the Government's stimulus package, investment in commercial property is projected to slump as business profits fall.
As businesses either fail or become smaller and access to credit remains tight, more office and industrial space will become available, leading to higher vacancy rates. This will hurt property operators and managers. On the retail front, the deteriorating labour market will give rise to more businesses vacating premises, while new construction will be limited as the pipeline starts to clear.
In the long term, rising consumer and business confidence, more capital spending and easier access to credit should see a return to solid growth in real estate and construction from 2010-11 onwards.
AGRICULTURE - RESILIENT DEMAND
Domestic demand for agricultural products is expected to be relatively resilient to the effects of the economic downturn, since they are considered to be everyday staples. The agricultural sector is affected by other highly volatile factors, such as commodity prices and exchange rates, and these will dictate farmers' fortunes over the coming years.
After reaching record highs during 2008, grains prices have begun to retreat. This is partly due to the decline in oil prices - many grain and oilseed prices were pushed higher as they were sources of alternative energy. Although the declines in world prices for grains are expected to be partly offset by the depreciation of the Australian dollar, sales are expected to decline overall.
Meat production industries are expected to continue to benefit from demand for high protein foods. The depreciation of the Australian dollar is expected to offset any weakness in global demand. Exports to major markets such as Indonesia and the Middle East are expected to be only moderately affected by the global downturn.
Unlike the meat-producing industries, the dairy segment will be adversely affected by the economic downturn. The global downturn has resulted in a significant correction in global dairy prices, which had been increasing strongly until mid 2008.
But Australian dollar prices are expected to remain higher than historical levels. Demand for natural fibres such as cotton and wool is expected to decline, due to a strong decline in textile and apparel output in the key fibre export market, China.
HEALTH - STAR PERFORMER
Healthcare is perhaps the only recession-proof sector. Irrespective of economic conditions, Australians will continue to get sick - in fact, it is possible that they will get sicker, as falling disposable income will lead to less money being spent on healthy living.
The country's ageing population means that incidences of poor health are more likely than in the past, which will prop up demand. Also, a drop in income may lead to instances of substance abuse and family breakdown, which is likely to stimulate the demand for counselling and rehabilitation services.
While falling consumer sentiment and income may lead to a drop in health insurance members, Australia's hospitals will remain in demand. Consumers who cannot afford private insurance will attend public hospitals, and this increase in demand will result in greater public funding.
The poor economic climate will have one clear effect - a slowdown in the growth of more "discretionary" forms of medicine. Optometrists, for example, will struggle to grow as consumers put off eye tests until better times. Most elective surgeries will face challenges, as they are delayed until late-2010, but urgent surgery remains essential, irrespective of poor economic growth.
Growth in alternative medicines, such as acupuncture, will remain strong, but is expected to be slower compared with a stronger 2007-08. Discretionary spending will drive many people back to conventional forms of medicine that are covered by programs such as Medicare, although the social shift towards more diversified forms of treatment will ensure that underlying demand remains strong.
EDUCATION - GROWTH
The education sector will be relatively unaffected by the economic downturn, as it receives a high level of government support. A weaker economy can boost demand for education and training, as workers seek to retrain or build up their skills. Rising unemployment in 2009 will encourage many people to enhance their future employment opportunities by improving their education.
There are fears that a global slowdown will halt the flow of international students to Australia. However, demand from the Asian region remains strong, and a weaker Australian dollar should help to support enrolment numbers, as the cost living is a key influence on the final decision made by international students and their families. For many of these students, the decision to study abroad was made long ago and they will not be dissuaded by the current economic climate.
Schools will benefit from the Federal Government's decision to allocate $14.7 billion to building and renewing school facilities across Australia. This is a welcome boost for public schools, which would receive 69.6% of the funds.
Subscribe to:
Post Comments (Atom)
No comments:
Post a Comment