The Opportunities and Challenges Facing Australian SMEs in 2015

Australian businesses are facing increasingly difficult conditions, as fluctuations across both international markets and the local economy create a persistent challenge that companies will need to address.

For CEOs and other senior executives, understanding these developments and positioning their business to make the most of new opportunities will be essential for realising strong ongoing growth. As the economic situation continues to fluctuate throughout 2015, CEOs are going to see even greater demand on their core leadership skills to navigate these changes.

This has been reflected in the most recent confidence index from The Executive Connection (TEC). In the research, we asked both C-suite executives and SME owners what they felt were the largest issues they saw affecting the market, along with how confident they were about the future.

Our survey revealed that although business leaders are confident about the future, 37 per cent feel the biggest barrier to future growth will be their ability to develop new innovation. A further 35 per cent are worried about finding the right staff, while 20 per cent cited difficulty in securing funding and access to capital.

“Uncertain economic conditions and the ability to access capital present SMEs with a challenging business environment. CEOs must rethink their current strategies to find new ways to grow and thrive in a competitive and unsteady market,” says Stephanie Christopher, CEO, The Executive Connection.

“In today’s challenging environment, the day to day management of running an enterprise can often leave business leaders feeling isolated, undermining their confidence. CEOs and business owners are faced with daily make-or-break decisions that could have significant implications on their business; and many leaders without a support network  feel they are making these big calls in a vacuum.”

To get a better understanding of the major trends affecting SMEs, Warren Hogan, the chief economist at ANZ Bank has given TEC an exclusive insight into the trends that will affect business performance in the next 12 months.

TEC ANZ Warren HoganThe Economy and Australian SMEs in 2015 – Warren Hogan, chief economist ANZ Bank

Cheap energy, money and low wage rates mean 2015 is a great year to get ready for growth.

We believe that the business operating environment will improve gradually through 2015, thanks to favourable trends in labour costs and energy prices, lower interest rates and the weaker Australian dollar. Indeed, we have already seen hints of these trends in recent surveys of small business. Eventually, we expect these factors will feed into stronger growth in most sectors outside of mining and related services, so SMEs should already be preparing themselves for a cracking 2016.

Overall, 2015 will continue to be characterised by the transition to a post mining-boom economy. There will be progress and some sectors will do extremely well in certain states. Businesses linked into the NSW construction market seem set for a good year, for example.

However the fallout from the end of the mining investment boom is taking the Australian economy along a lumpy path and 2015 could continue to see some bumps. Conditions are likely to be stronger in 2016 and so this is a good year to get prepared for better times ahead by taking advantage of relatively low costs for staff, energy and money. ANZ remains confident the Australian economy will make the transition from the mining boom back to what we call ‘business as usual’. A steady expansion of the economy lead by business spending, housing investment, consumer spending and employment growth across a wide range of sectors is still the most likely outcome.

The political scene will remain difficult, with the commonwealth and most state governments reluctant to spend – due to their ambitions for fiscal consolidation. There is also pressure for governments to find additional revenue and the GST is vulnerable to being broadened or lifted.

However there is unlikely to be much progress on taxation or Industrial Relations (IR) reform this year. Any big bang on the policy front that might make a material difference for businesses will likely have to wait until the Abbott government’s second term, although a second term for the Abbott government is looking less likely than it was a year ago. Two of our biggest three states will be disrupted by elections, but these will be over and done by the end of March. Both the Baird Government in NSW and Newman Government in Queensland seem likely to hold onto power according to opinion polls and betting markets.

Labour Costs

There are two main components to labour costs; the wage rate and the administrative elements of hiring and firing. We think that overall labour costs will remain steady (or only grow a little bit), driven by softness in wages.

The administrative costs around labour will not really change. The government has stayed away from IR thus far and we can see very little relief from taxes or regulations in the short-term. The labour market remains soft despite some evidence of rising hiring intentions. Ongoing job losses in some sectors and strong labour force growth are pushing the unemployment rate higher. This is hurting consumer and ultimately business confidence.

But the unemployment rate is drifting up and the wages of Australian workers, which were the most expensive in the world a few years ago, are slowly adjusting. Some of that change is happening via the weaker Australian dollar but it is also occurring through wage restraint. Australian wages have failed to keep up with inflation in recent years due to weakness in labour demand. With inflation likely to edge lower this year, and the labour market to remain soft, wage growth will probably remain weak for another year.

The really weak spot for employment is for young people. The unemployment rate for under 25s is now as high or higher than the early 1990s recession. This could be used to strategic advantage by business. Targeting the young and training them for medium-term growth is worth thinking about over the year ahead. Older workers too are a potential source of talent and provide business with a wealth of knowledge. Population ageing can advantage those businesses willing to invest in maturity and experience and the data plainly illustrates that older workers – particularly older women – are keen to stay in the workforce for longer.

In the presence of a soft labour market, a lower headline inflation rate is more likely to filter through to wages and then core inflation as well. We now expect the consumer price index (CPI) to trough at around 1.5 per cent in mid 2015 from 2 per cent previously. Core inflation is now expected to be near 2 per cent in late 2015.

Energy Costs

Global oil prices have started 2015 at about half the level they were a year earlier. Most of this declined occurred over the last six months with the oil price falling by more than 30% in December and early January. This means that energy costs will fall in the early months of 2015 and will likely stay low for much of the first half of the year. We think oil prices will remain low over the course of 2015 and will trickle through the energy complex, putting downward pressure on all energy costs. This is not good for energy producers (countries and companies) but is great news for everybody else. It puts more money in the pockets of consumers to spend elsewhere and it lowers business costs, enhancing profitability and freeing cash flow for investment or debt reduction.

If the fall in energy costs is sustained, we believe it will support confidence across the economy and increase the pace of the non-mining recovery.

Interest rates

The big fall in global energy prices means lower than previously expected inflation in 2015 which then provides scope for lower interest rates.

Interest rates are at historical lows and have been steady for much of the past 18 months. We think that will continue in 2015 with little chance of a significant rise in rates. Indeed, long-term rates have declined in early 2015 and there is a growing probability that the Reserve Bank of Australia will lower the cash rate again in 2015, given the weak inflation outlook and a sluggish non-mining economy. Interest rates and the availability of credit are highly favourable for business in Australia at present, making it a great time to invest.

Australian dollar

The Australian dollar started 2015 at the lowest level in five years against the strong US dollar. At USD0.80, the AUD is well below the five year average level of USD0.97.

Weaker growth and lower inflation in 2015 will provide the Reserve Bank of Australia with a reason and the scope to take the cash rate down 50 basis points to 2.00 per cent over the first half of the year. In our view the Australian dollar is providing support to the economy, encouraging companies that were choked by the mining boom to expand investment and export activity again or compete more easily with imports. This will help growth in the economy.

However, the Australian dollar has not fallen as much against other currencies. The Yen and the Euro have been weak as their central banks continue to expand unconventional policies which are ultimately aimed at weakening their currencies. This is likely to continue. The Australian dollar is a little weaker against most Asian currencies – importantly those of Indonesia and India – but not by much. The other big move has been against the NZ dollar, where the Aussie is at its weakest level in decades.

While the weaker currency helps the competitiveness of Australian companies, it does make imported goods more expensive. With the currency likely to continue to fall through the course of 2015, this suggests companies considering significant capital goods purchases from overseas should lock those in, or at the least the exchange rate, as soon as possible.

Demand in the economy

All these factors should support growth in the economy over the course of the year ahead even if that growth is still a bit below historical norms. The key is that the non-mining economy will continue to improve as headwinds abate and the factors discussed above exert a positive influence on activity. For SMEs it is going to be important to get in ahead of the crowd and take advantage of these positive conditions.

The exception is the mining sector, which is suffering from a wind down in investment activity and weaker international prices. The mining sector will continue to shrink over the year ahead. We do however expect commodity prices to stabilise over the first half of the year, helping the economics of mining down the track.

At the other end of the spectrum, the residential property market – and to a lesser extent the non-residential construction sector – should continue to do well.

Construction approvals suggest that building activity in most of the major cities will remain strong in 2015. This should increase employment in these sectors and have positive spin-offs for related manufacturing activities.

The great bulk of the economy is still just muddling through with business confidence once again softening in late 2014, it may take until mid-way through the year for an improvement in momentum to show up in business spending and employment.

About the Author

Warren Hogan Chief Economist, ANZ Bank

Warren runs Economics and Global Markets Research and is responsible for ensuring a globally coordinated ‘ANZ View’ for internal stakeholders and customers. He has worked as an economist and strategist with Australian and international banks for nearly two decades, joining ANZ in 2005 before becoming chief economist in 2010. Warren’s research focus is on global macroeconomics, monetary economics and financial markets. He is also the Secretary of the Australian Business Economists (ABE) as well as a member of ANZ’s Regional Investment Committee.

Identifying opportunities in the Asian Century

Asia has experienced rapid growth in the 21st century, which has driven a need for goods and services as its burgeoning middle class begins to expand.

Australia is well placed to take advantage of this growth. In fact, the country has already enjoyed a steep rise in demand for its natural resources over the last decade, helping to strengthen the mining sector.

However, as the resources boom begins to taper off, Australian companies must shift their efforts in order to continue benefiting from the multitude of opportunities available in Asia.

A 2012 whitepaper by PricewaterhouseCoopers (PwC) noted that while the majority of Australia’s trade is with Asia, the country only spends 6 per cent of its overseas direct investment in the region.

PwC said this figure is far too low for businesses to take full advantage of potential growth opportunities.

Similarly, a Deloitte report last month urged organisations to become ‘first movers’ rather than ‘fast followers’ when it comes to commercial deals abroad. This means firms must establish themselves as innovators rather than settling for second best.

Selwyn D’Souza, lead strategy partner at Deloitte, said: “Strengthening our already strong relationships with the new global giants such as China and India will become more important than ever as we seek to establish a stronger presence in their markets and their companies continue to enter ours.”

Opportunities in Asia

According to Deloitte, a billion people are expected to enter the middle-class globally within the next 20 years – and a significant proportion will be in Asia.

The OECD estimates 66 per cent of middle-class people will be Asian by 2030, compared with just 28 per cent in 2009.

This increase in consumption provides opportunities to Australian companies across a wide range of sectors, particularly financial services, telecommunications and retail.

Businesses that seek cross-sectoral collaboration between other companies, governments and non-profit organisations are likely to perform better, as this creates a greater social impact.

“It will be the forward-looking Australian businesses that proactively take opportunities to innovate and serve the needs of low-income consumers in the Asia-Pacific region which will enjoy the benefits of increased market share, profit growth and brand differentiation,” Ms D’Souza stated.

However, PwC said organisations must be willing to invest in Asia to have the best chance of gaining market share and forging ongoing relationships with businesses in the region.

Australian CEOs will also require a keen understanding of the many different Asian cultures in the region. The conflict between Western and Eastern values could be a stumbling block unless enterprises are adequately prepared.

Building an Asian presence

Despite the challenges businesses will face growing market share in Asia, the positive outcomes and expansion opportunities are significant.

Here are some strategies that PwC noted could help your company make the transition a little easier.

Invest in human capital: Recruiting or promoting people with extensive Asia expertise is vital.

Not only will this help your business to better understand the marketplace, it also facilitates relationships with Asian firms, which are typically built in person rather than over long distances.

Assess market potential: Review your existing growth strategy through an Asian perspective and identify the best opportunities for your particular business.

Isolate risks, re-evaluate existing brands and products, and strengthen any existing ties you may have in Asia.

Select appropriate market entry options: Entering new international markets can be a challenge, so consider different investment vehicles.

Whether you opt for a joint venture, export-only model, licensing arrangement or other operating structure will depend on your specific commercial objectives.

What next?

Given that the resources sector is already beginning to slow in Australia, the need to build further economic drivers in other sectors becomes more apparent.

Organisations that fail to cater to growing Asian demand could find themselves struggling to succeed against more forward-thinking competitors.

However, CEOs must move fast. These changes are already underway and building for the future must begin as soon as possible, particularly when it comes to attracting and retaining the right staff to excel in new market conditions.

“While many organisations understand the need to recruit resources with the necessary skill set, the demand for this key talent far outweighs supply,” PwC stated.

“It is imperative that companies start planning now how to position their organisations and their people for the Asian Century.”