Outlook: Business confidence sketchy despite states signalling re-openings
Mass global supply chain disruptions driving up shipping costs and delivery times
Mid and tail of supply chains hurting most, pain exacerbated by poor access to cash for SMEs
Risk: Supply-side inflationary pressures are more than just transitory
Risk: Uncertainty elevates the savings ratio and leads to underwhelming consumption Earlytrade business registrations, indicator for cash demand, correlates to business confidence concerns
Risk: Stimulus wind-back increases unemployment, reduces GDP and generates stagflation pressures
Short-term price pressures meet long-term shifts
Global supply chains are close to breaking point with worldwide shortages and disruptions driven by lockdowns, new consumption patterns, and shipping container shortages and mis-locations. Existing global supply chain issues like shifting trade policy, inadequate port infrastructure in Asia, and a lack of planning in a post-Brexit UK have been exacerbated. The result is short-term price pressures combining with long-term secular shifts.
So what? for Aussie businesses?
In Australia, 40% of businesses say supply chain issues have impacted them "to a great extent". SMEs have been hit the hardest.
Smaller businesses reported supply chain distress nearly 50% more than larger counterparts. Significantly, in addition to warehousing and working capital limitations, most are still paying upwards of 7% for cash.
Key risk: Supply-side inflationary pressures are more than just transitory
Ultimately, Australia has a build up of secular supply chain pressures that threaten to dispel the ‘transitory’ nature of inflation. Small businesses remain vulnerable to going bankrupt, which further compounds supply issues.
Large corporate clients are reporting to Earlytrade that it’s becoming a trade-off between supply chain risk, and costs. The majority are finding that they are forced to simply pay more to shore up their supply chain.
It creates an environment where the inflation risk is to the topside versus what the RBA expects over the coming years, with the flow-on implications for monetary policy. Likewise with input costs rising, the margin pressure for small businesses puts a huge amount of additional strain on their cash flows and ability to survive.
Key risk: Uncertainty causes an elevated saving ratio and underwhelming consumption
The heightened level of uncertainty for both businesses and consumers could lead to underwhelming consumption figures, as the saving ratio remains somewhat elevated.
Compared to the RBA forecast, there’s downside risk to look out for. Even Governor Philip Lowe acknowledged the coming rebound is likely to be less pronounced than last year, despite the RBA forecasting GDP growth of 4% for the December quarter (greater than the 3.1% last December).
Confidence to navigate the reopening
Throughout lockdowns and sector shutdowns, Earlytrade business registration numbers have been a leading indicator for big swings in business confidence, particularly on the downside.
Clear spikes in March 2020 (as the pandemic began) and July this year (just before business confidence took another hit) highlight the correlation. A sizable spike in registrations in September which (if the trend sticks) suggests a negative outlook for business confidence in the December quarter.
The mindset of businesses appears to be one of preparedness and cautiousness as they seek to shore-up liquidity options.
Key risk: Stimulus wind-back increases unemployment, reduces GDP and generates stagflation pressure
Fear of more lockdowns, uncertain futures, and reduced government support may cause businesses to be unwilling or unable to hire more staff.
With rising input costs and a potentially benign demand environment, , there is potential for unemployment to come in above RBA expectations, creating transitory stagflation pressures.
Whilst unlikely to be a long term trend, there will likely be a feeling out period as people adjust to what the new normal looks like.
However, market volatility is assured.
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