It’s coming towards the end of the year, and a time when many businesses are planning for the future. We spoke to the chief economist for Business NSW, Dr Sherman Chan, to get her insights on what’s in store for 2024. What we found was that there’s plenty to look forward to, despite some bumps along the way.
Interest rate hikes provide scare but the economy is in good shape
According to the latest Business NSW Business Conditions Survey, the Reserve Bank of Australia (RBA)’s interest rate rise in November 2023 – its 13th since May 2022 – has had a big impact on business confidence.
“The first 12 interest rate hikes were generally expected, but the latest one really shocked people,” Dr Chan says.
The cohort that completed the survey after the RBA rate hike had a confidence level of -66.2, notably lower than the confidence level of -52.1 for those who submitted their survey responses before.
Dr Chan explains that interest rates affect businesses in so many ways – not only increasing their costs and access to capital, but causing a weakening demand from customers who have less spare cash to spend. In fact, according to figures from the Australian Bureau of Statistics, Australia’s household saving ratio is just 1.1, its lowest level since 2007.
However, Dr Chan says it’s not all doom and gloom and the worst thing a business can do is nothing.
“Business confidence can be a self-fulfilling prophecy. Instead of always preparing for the worst, businesses should be focusing more on exploring opportunities,” she says.
“We still have a labour shortage – and if you don’t have enough people to do all the work, it shows business conditions are not that bad. From our recent research, we know that for every business that’s struggling out there, there’s another business that’s thriving.”
Dr Chan says despite the interest rate increase, it’s important to remember that the Australian economy is resilient, and chances of recession are low.
“Our economy is in solid shape. If you look at the latest GDP data, you’ll see the economy actually continued to expand, even though it was at a slower pace. I think a recession is highly unlikely,” she says.
“Business owners need to have faith that there are still plenty of opportunities out there. They must be adaptable and agile in order to seize all these opportunities. This means being ready to reengineer their processes and modify service or product offerings if needed to meet changing demands."
Go for a productivity boost
For businesses that are concerned about performance, she recommends paying closer attention to productivity.
“Output per hour worked has been on a downward trend for quite some time now, so there’s a lot to be done there,” she says.
According to the Business Conditions Survey, for businesses that have invested in lifting productivity over the past 12 months, the most common approach was staff training, followed by machinery and equipment and IT programs. However, Dr Chan says that if a business has invested in training and still has not seen a boost in productivity, then they should look carefully at whether the training they’ve provided is relevant enough.
Meanwhile, another way to improve productivity is to invest in technology like AI.
“Areas like education and professional services tend to be more receptive to AI, but I do encourage businesses to consider it regardless of what sector they're in. Industries like construction and manufacturing can consider adopting AI to make their processes more efficient, more accurate, and safer for workers .”
Support needed for regions
Meanwhile, Dr Chan discussed conditions as we come into the Christmas trading period, which is one of the busiest of the year for businesses in areas like retail and hospitality.
On average, businesses across NSW expect Christmas trading to drop 11% from a year ago. However, this is more acute in the regions – Sydney businesses expect a drop of 9%, compared to 24% in Far West and Orana and Hunter Valley, 18% in the Riverina, and 16% in the Central West.
“We all need to go out and enjoy ourselves and support our economy,” she says.
“And with our regions harder hit than metro counterparts, we should also get out and explore regional places which are beautiful but sometimes underpromoted,” she says.
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