Data Wrap - national business confidence falls to record low

In today’s Data Wrap we review the latest ABS survey on the business impacts of COVID-19, and consider other leading indicators of economic activity which provide insight into the national economic impact of coronavirus, including the NAB’s latest business surveys and the Australian Performance of Manufacturing Index.

Business Impacts of COVID-19
The state, national and global economies face the prospect of significant downturns in the face of various social distancing and other operational restrictions that have been widely implemented over the past month in order to mitigate the spread of coronavirus. As most of the economic indicators we cover in the Data Wrap are produced with a significant lag, they generally do not capture these latest changes to the economy. In order to better understand how COVID-19 has impacted the way businesses operate, employ people, and their cash flow has changed, the ABS has fielded two surveys to measure the business impacts of COVID-19. While the surveys do not provide state level detail, they still provide useful information on general business impacts and differences across industries, which will generally apply across all states.

The latest ABS survey was undertaken from 30 March to 3 April, which followed the Australian Government’s announcement on 29 March 2020 of increased social distancing restrictions and additional business support measures, and coincided with the announcement on 30 March of the $130 billion JobKeeper payment program which is designed to ensure that employers stay connected to their employees. This program provides a flat $1,500 per fortnight wage subsidy to employees and may assist approximately 6 million workers nationwide.

According to the latest survey 90 per cent of Australian businesses were still operating in the week commencing 30th March 2020. Of those businesses that were not trading, 70 per cent reported that this was due to COVID-19. A large majority of businesses (84 per cent) that had paused trading due to COVID-19 did so due to the introduction of government measures. More than 40 per cent of these businesses indicated that a reduction in demand for their products and services was another reason for not trading.

Industries that involve a high degree of social consumption activity that cannot necessarily be shifted to online delivery have been most affected by the social distancing restrictions. Hence those industries which had the lowest proportions of businesses currently operating included ‘arts and recreation services’ (47 per cent), ‘accommodation and food services’ (69 per cent), and ‘retail trade’ (76 per cent). Interestingly, a relatively low share of businesses in ‘information media and telecommunications’ were currently operating (65 per cent), which may reflect, in part, impacts stemming from cut backs in advertising spend.

Industries which had the highest proportion of businesses still operating in early April included ‘professional, scientific and technical services’, ‘financial and insurance services’, ‘transport, postal and warehousing’, and ‘electricity, gas, water and waste services’ (more than 95 per cent respectively).

Almost half (47 per cent) of trading businesses had recently made changes to their workforce due to COVID-19. The most common change was temporarily reducing staff work hours, with just over one quarter of trading businesses doing so. The next most common responses included placing staff on paid leave (11 per cent), and placing staff on unpaid leave including standing down staff (9 per cent). On the other hand, a small proportion of trading businesses had temporarily increased staff work hours (2 per cent) and/or hired additional employees (3 per cent).

In terms of operational impacts, two-thirds of Australian businesses reported a reduction in turnover or cash flow as a result of COVID-19, while a similar proportion (64 per cent) reported a reduction in demand for their products and services. Government restrictions on operations and changes in demand have had a significant impact on supply chains, with 29 per cent of currently trading businesses reporting difficulty in sourcing stock or raw materials. Meanwhile, a small proportion of businesses reported positive impacts in terms of experiencing an increase in demand for their goods and services (11 per cent), and/or an increase in turnover or cash flow (4 per cent).

Given the significant government restrictions that have been implemented on businesses operating in the accommodation and food services sector, it is unsurprising that almost all businesses in this sector reported a reduction in demand for their goods and services. Others industries in which a relatively large proportion of businesses reported reductions in demand included ‘transport, postal and warehousing’, ‘construction’, and ‘administrative and support services’.

Businesses are adapting to the rapidly changing environment by altering their financial arrangements and introducing new products and processes. Almost four out of ten trading businesses reported changing the method of delivery for their products or services (including a shift to online services), while 10 per cent reported having introduced new products. The most commonly reported financial management changes included renegotiating property rent/lease arrangements (38 per cent) and deferring loan repayments (24 per cent). It also appears that the current crisis has pushed some firms into action, with just over one quarter indicating that they have brought forward their investment plans.

NAB Business Confidence Index Falls to Record Low
Business confidence in Australia as measured by the National Australia Bank's index of business confidence collapsed in March, plunging to -66 points, down from -2 points in February. The latest result is the lowest on record and well below the low of around -30 points recorded during the Global Financial Crisis.

The index of business conditions also fell sharply, from a net balance of zero in February to -21 points in March, which is only a little worse compared to the lows recorded during the GFC. Measures of profitability, employment and trading all declined sharply.

Australian Performance of Manufacturing Index Jumps in Response to Stockpiling
The Australian Industry Group’s Australian Performance of Manufacturing Index (APMI) rose sharply in March, by 9.4 points to 53.7 points, in seasonally adjusted terms. The shift above 50 points indicates that the manufacturing sector is generally expanding, and follows four months of readings that were consistent with general contraction in the sector. In spite of the latest improvement, the index remained well below its previous peak of above 60 points reached in early 2018.

The recent jump is almost entirely due to stockpiling activity with there being a surge in demand for household essentials such as food products and personal care items which retain a significant degree of manufacturing within Australia, particularly for food and beverages. In contrast, the results for traditional manufacturing sectors such as machinery and equipment and metal products pointed to declining conditions within these sectors.

The somewhat conflicting results reported by the APMI and NAB surveys could be in part attributed to manufacturing now representing only a small proportion of overall economic activity within Australia.