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CEOs anticipate deteriorating conditions in 2020: Action needed to address caution, a slowing economy and weak productivity

The Australian Industry Group's latest CEO survey predicts deteriorating economic conditions for 2020 heightening the need for early action to stimulate the broader economy and for a determined effort to lift productivity.

Ai Group's annual Business Prospects report for 2020 is based on a survey of 252 CEOs in late 2019. The results show that even before this summer's devastating bushfires, Australia's CEOs were pessimistic about business conditions for 2020:

  • More CEOs anticipate a deterioration in trading conditions in 2020 relative to 2019;
  • Fewer CEOs expect an improvement in their own turnover, profit margins and productivity in 2020 than for any year since 2015; and
  • As we enter 2020 a smaller proportion of businesses plan to increase their spending on capital investment and research & development, compared with the past two years.

Ai Group Chief Executive, Innes Willox, said: "While Ai Group's latest survey reaffirms an immediate outlook for the economy that is flat at best, we can secure our future economic prosperity with timely and multifaceted action to address substantial headwinds. It's a challenge for governments, for businesses and for the broader community, but it's one we should rise to with confidence that we will emerge stronger.

"In part, this gloomier outlook stems from the disappointments of 2019. CEOs' views also reflect uncertainties both in the global economy and those surrounding major areas of domestic policy, including energy, climate policy and the much-needed revival of national productivity growth.

"Another layer of concern arises from the fragile state of domestic demand in Australia, with both household and business spending indicative of the slow growth of domestic incomes (outside of the mining sector) and the pervasive mood of caution in both the business and household sectors.

"Australia's extraordinary bushfires have further weakened the outlook for 2020. Considerable resources and effort will now need to be directed to recovering lost ground," Mr Willox said.

KEY POINTS

  • More CEOs are expecting a deterioration in their trading conditions in 2020 (relative to 2019) than an improvement, with 40% of CEOs expecting no material change in their business conditions in 2020 and 34% expecting a deterioration, but only 26% expect conditions to improve. This indicates 2020 will be the first 'net negative' year for Australian business expectations since 2015, on a 'net balance' basis (that is, more CEOs expecting a fall than a rise in general business conditions).
  • On a 'net balance' basis, business expectations for turnover, profit margins and productivity are all lower for 2020 than for any year since 2015 (that is, more businesses are expecting no improvement in these indicators in 2020).
  • More positively, employment growth is expected to edge higher in 2020, with a greater proportion of businesses planning to increase their workforce over the coming year.
  • In response to the disappointing trading conditions experienced in 2019 and the modest growth outlook for 2020, fewer CEOs plan to increase expenditure on various types of investment in 2020:  
    • 40% plan to increase spending on staff training in 2020 (lowest 'net balance' since 2017);
    • 43% plan to increase spending on new technologies (lowest 'net balance' since 2015);
    • 23% plan to increase spending on R&D (lowest 'net balance' since 2015); and
    • 27% plan to increase spending on physical capital (CAPEX) in 2020 (lowest 'net balance' since 2015).
  • 60% of businesses reported they had revised their plans and strategies in 2019 in response to changes (including deteriorations) in conditions, up from the previous three years.
  • The concerns CEOs hold for their businesses remain centred on their customers in 2020, with 41% of CEOs listing 'lack of customer demand' as the top inhibitor to their business growth.
  • Concerns about the workforce also remain prominent for 2020. 20% of CEOs list skill shortages as their top inhibitor to growth (similar to 21% in 2019), 11% raise concerns about wage pressures and/or high wage growth and 8% list industrial relations flexibility as an inhibitor to their growth.
  • In response to these challenges, 31% of CEOs will focus on improving sales of their current product range and 26% will seek to introduce new ones (similar proportions to 2019). Developing a stronger online presence and/or new markets is also a favoured business strategy for growth in 2020.
  • Australia's CEOs overwhelmingly recognise that investment is currently one of the weak links in the economic outlook, for a range of reasons.
  • This year's CEO survey shows the factors that are influencing business investment decisions in 2020 include:  
    • Expected expansion and innovation (the top factor in investment decision-making for 34% of CEOs);
    • Expected rates of return (the top factor for 18% of CEOs);
    • Expected payback periods (17%) and the need to find business cost reductions (13%); and

Interestingly, access to funding and the cost of funding are the leading concern of relatively few CEOs as we head into 2020.

POLICY PRIORITIES

Mr Willox said: "The policy priorities for 2020 revolve around the need for concurrent action on three broad fronts.

  • The importance of maintaining the strong focus on bushfire-related recovery, rebuilding and resilience.
  • The need for timely action to promote business investment, both as a means of stimulating near-term activity and employment and as part of a longer-term focus on lifting national productivity.
  • The third front – imperative to revive advances in productivity – is fundamental to improved material living standards and to building the broader prosperity and cohesion of our communities.

"With action needed on each of these three fronts, the decade is opening with major challenges not just for governments but also for businesses and for the broader community. Joint efforts are needed in fighting and recovery from bushfires; in getting the economy moving; and in laying the foundations of our future prosperity," Mr Willox said.

Download the full report here
 

Responses to the survey were received from the CEOs of 252 private-sector businesses across Australia in manufacturing, services, construction and mining services.


Media enquiries:
Tony Melville – 0419 190 347