What does 2015 hold for small business?

Geoff_WebsiteBy Geoff Scofield, Westlawn Finance MD & CEO
16 February 2015

What’s in store for Australian businesses in 2015?

Here we examine the outlook for 2015 in 3 key areas: business confidence, interest rates and fuel prices.

Business confidence: Glass half empty or half full?

As with last year, 2015 looks set for a repeat in terms of business confidence as business owners continue to struggle over whether they view the glass as half empty or half full.

According to accounting software firm, MYOB, Australia’s SME sector has experienced one of the highest revenue performances in the last 3 years. While those experiencing revenue declines have fallen to a 5-year low.

So, we appear to be heading in the right direction.

And looking ahead to 2015, the September 2014 MYOB Business Monitor Report found that 32% of business operators expect to see revenues increase in the next 12 months (down slightly from 34% in the March survey).

Similarly, fewer businesses expect to see revenue decline in the year to August 2015, down from 22% in March to 18% in the latest survey.

The report found business confidence remains relatively steady, with 24% of SME operators expecting the economy to improve in 2015 – up slightly from 23% a year ago.

Speaking about the report’s findings, MYOB chief executive, Tim Reed said, “We are very pleased to see the latest revenue results for Australia’s SMEs continuing to move in the right direction.

“Although the latest Business Monitor reflects that running a small business in the current economic environment is not easy, many local operators are beginning to see their hard work pay dividends. This survey again reinforces how resilient our SME community is and underscores how important they are to the economy as a whole. It is particularly heartening to see many more businesses looking forward to an improved end to the year, and confident about what 2015 will bring.”

The latest Sensis Business Index, which surveys 1,000 small and medium businesses, found 51% are feeling positive about the year ahead. This is down slightly from 53% in the October 2014 Sensis survey.

Sensis chief executive John Allan said: “Confidence levels vary across the states but in general, regional businesses are significantly less confident than their metropolitan counterparts about the coming year.”

It’s important to note that both the MYOB and Sensis surveys were conducted prior to the latest RBA interest rate cut and the recent fall in fuel prices. And if these continue, as we’ll explore below, business confidence, particularly regional businesses, may receive a welcome boost.

Interest rates: Further falls forecast for 2015

With one interest rate cut already this year, what are the expectations for interest rates over the remainder of 2015?

That all depends on who you listen to … but a growing consensus is forming.

At the end of last year, and into January, senior economists were divided over whether the Reserve Bank would cut the official cash rate during 2015.

Back in early December, NAB was predicting 2 separate 25-basis-point cuts to the cash rate this year which would take the official rate to a new record low of just 2% pa. Following weaker than expected gross domestic product (GDP) growth figures, Westpac forecast cash rate reductions for February and March. ANZ, on the other hand, remained of the view that rates would stay on hold but acknowledged “the risks are skewed towards some easing in 2015”.

By early January, Commsec Chief Economist, Craig James, was of the opinion that the fall in petrol prices would act as a de facto rate cut. “Lower petrol prices and a lower Aussie dollar mean that the Reserve Bank can leave rates steady,” he said.

Deloitte Access Economics director, Chris Richardson, agreed: “The Australian dollar is doing the Reserve Bank’s work for it”.

Of course, we now know that those in the “on hold” camp were proved wrong with the RBA cutting the official cash rate by 0.25% pa this month at its first board meeting of the year.

AMP Capital chief economist Shane Oliver said the Reserve Bank had been forced to cut rates, and believes there are good reasons for the RBA to make further cuts.

“Growth is too low, running at around 2.75% through last year, which is well below potential of around 3.00% to 3.25%, and the level needed to prevent a rise in unemployment,” Oliver said.

So, while at the end of last year, opinions were divided on whether we would see any rate cuts this year, there now appears to be a growing a consensus that following the February cut, another rate cut may just be around the corner taking the official cash rate to an all-time low of just 2.00% pa.

And then just last week, NAB’s chief economist, Alan Oster, went one step further, raising the possibility of a third interest rate cut this year.

Fuel prices: Easing pressure at the petrol pump permanent?

The year began on one positive note for many small and medium businesses – the national average petrol price had fallen to a 6-year low thanks to global falls in the price of oil. And while those of us in the regions have not seen fuel drop as low as those in the metropolitan areas, it’s been a long time since we’ve seen prices at the petrol pump this low.

But, how long with lower petrol prices last? That depends on what will happen to the global price of oil over the coming months. And on this question, the experts appear to be in agreement.

The Sydney Morning Herald reported on 13 January that: “Ratings agency Standard & Poor’s has cut its oil price forecasts for the fourth time in three months”.

“S&P slashed its 2015 Brent oil forecast by more than 20% to $US55 a barrel, and suggested that a price recovery was unlikely. The ratings agency also downgraded its 2016 forecast by 13% to $US65 a barrel, and said a return to $US80 a barrel was not likely until 2017 at the earliest. The outlook follows seven months during which Brent prices have more than halved on the back of weak demand and strong oil production from OPEC nations and shale producers in North America.”

Then, on 27 January, the Economic Times, reported that UBS had also lowered its average oil price forecasts for this year and next, saying the steepness of the market selloff exceeded its expectations.

Likewise, Goldman Sachs predicted that oil prices will need to be “lower for longer” before a balance is restored between supply and demand, and the investment bank predicted Brent prices could fall to $US42 a barrel by early April.

And KPMG’s Bill Robinson stated adamantly that: “Lower prices are here to stay because Saudi Arabia is no longer prepared to cut production to offset the increased supply from shale, following the fracking revolution …”

While the way fuel prices in Australia are calculated is complex, as noted in this RBA article, The Pricing of Crude Oil, the trend towards lower global oil prices should help to keep a lid on prices at the pump over the coming 12 months.

Of course, there needs to be a note of caution when predicting longer term global oil prices given the volatility of the Middle East.

Looking on the bright side

So, does your business see the glass as half empty or half full in 2015?

While there is reason for caution, there is also room for optimism over the coming 12 months. With lower interest rates and lower fuel prices … and add to that a falling Aussie dollar, many local businesses should benefit in one way or another.

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