Seven Predictions from the 2018 Directors’ Sentiment Index

Stewards of organisations large and small had optimistic expectations about economic progress in the coming year, with a few exceptions. Read the top seven predictions from Australian directors arising out of the bi-annual Director Sentiment Index (DSI) research. The DSI is the only research of its kind, gauging the priorities and concerns of Australia’s foremost sector leaders.

1. Economic indicators

Directors expect an increase in inflation, wages and the cash rate in the next 12 months. The Consumer Price Index currently sits at 1.9%, below the Reserve Bank of Australia (RBA) target of between 2-3%. Wage growth sits at 2.1%.

Directors also anticipated a lower unemployment rate over the next 12 months. On 3 April, RBA Governor Philip Lowe said in a statement that although the unemployment rate had declined over the last year, it had hovered around 5.5% in the past six months. “The various forward-looking indicators continue to point to solid growth in employment in the period ahead, with a further gradual reduction in the unemployment rate expected,” Governor Lowe said.

Commenting on jobs data released last week, AICD Chief Economist Stephen Walters GAICD wrote the 2018 labour market has started on “unexpectedly weak footing” and the relatively flat unemployment rate can be accounted for by “pronounced movements of people into and out of the labour force”. However Walters concludes, “All that said, the employment outlook remains positive. Business surveys suggest that most firms still expect to lift hiring this year, a message reinforced by our own Director Sentiment Index this week.”

2. Global and domestic economic strength

The latest DSI found directors have become optimistic about the Australian economy compared to the second half of 2017, with 31% perceiving the economy as strong at present. Directors are also optimistic about the Australian economy in the next 12 months compared to the second half of 2017, with 34% expecting it to be strong.

Positive sentiment also grew around the health of the Asian economy, with 63% of directors perceiving the Asian economy as currently strong and 61% expecting it to remain strong over the next 12 months.

The Organisation for Economic Co-operation and Development (OECD) found in its ‘Economic Outlook for Southeast Asia, China and India 2018’ report, “Growth in China and ASEAN is picking up thanks to a strong trade rebound and resilient domestic consumption, while India’s growth is expected to nudge downward as a result of taxation and monetary reforms.” OECD also expected “Emerging Asia” economies to grow by 6.3% over 2018-2022, with infrastructure a key factor affecting medium-term growth. “The most prominent risks to growth in the region are the possibility of more rapid monetary policy normalisation in advanced economies, the rise in private-sector debt; and the expansion of trade restrictions globally coupled with limited progress in regional trade agreements.”

The DSI showed directors are significantly less pessimistic about the health of the European economy compared to the second half of 2017. However, 41% of directors perceive the economy as weak at present, and 36% expect it to remain weak in the next 12 months. The sentiment for the US economy is increasingly optimistic, with 44% of directors perceiving it as presently strong, and 45% expecting it to be strong over the coming year.

3. Growing profits

Profit optimism remained stable with 38% of directors surveyed expecting an increase in profits for the first half of the financial year. ANZ economists told Business Insider in March that while recent Australian Bureau of Statistics (ABS) profitability data showed a quarterly increase in late 2017, the increase was not as strong as headline figures suggested. “After adjusting for inventory valuations, the result was much weaker with profits actually falling 2.4% [over the quarter].”ANZ found, “While this is a solid result, the buoyancy in business conditions and profitability indicators would have suggested a stronger result.”

4. Rising Regulation

In less positive news, directors continue to feel pessimistic regarding the level of ‘red-tape’ in the next 12 months. Some 42% of directors surveyed expect an increase in red-tape. Commenting on the aspects of regulation which most affect their business, 78% of directors identify corporate reporting requirements followed by workplace health/safety and preparing/paying taxes.

On 29 March, Federal Treasury Scott Morrison announced a new government inquiry into “impediments to business investment in Australia”. “Business has told us that regulations are one major impediment to investment, especially in terms of the volume of regulation and compliance costs. Businesses find it particularly difficult when they are required to interact with multiple levels of government,” Morrison said.

5. Mergers & Acquisitions

Continuing on from 2017, 63% of directors expect a rise in the level of mergers and acquisitions (M&A) over the coming year. In December, Reuters reported Australia saw mergers and acquisitions worth about $120 billion in 2017, the highest since 2011. This was helped by the biggest takeover in Australia’s history - a $25 billion bid for mall operator Westfield Corp from Europe’s Unibail-Rodmaco, according to Thomson Reuters Deals Intelligence.

Law firm Herbert Smith Freehills nominated renewables, financial services, healthcare, agribusiness and infrastructure assets as the “hot sectors” for M&A activity. In its ‘Top 10 Australian M&A predictions’ it forecast that positive motivators like capital availability and strategic imperatives along with renewed global business confidence would see Australia get its “share of mega-deals”. However, the law firm caveated its optimism noting “The political headwinds globally are not blowing strongly in favour of deal-making. From the recent Trump administration move on the AT&T – Time Warner deal, to nationalistic sentiments around the world on foreign investment rules, the trend in this direction is unlikely to change anytime soon.”

6. Credit availability

Expectations of credit availability in the future have remained optimistic, with 48% of directors predicting that credit for asset purchases will be somewhat or freely available over the coming year, 40% expect the same regarding credit for investment purposes and 42% expect the same regarding working capital purposes.

7. ASX

The DSI showed confident in the ASX All Ordinaries index remains optimistic, with 52% of directors expecting the index to rise in the next 12 months.