|The Australian Economy Guide
sector by sector
Article from: Madeleine Heffernan on SmartCompany
The only certainty is uncertainty: chances are the Australian economy is headed for another topsy-turvy year.
But for the nation's small and medium sized enterprises, there are good sectors to operate in, and not so good. SmartCompany has taken the pulse of 14 key industries. Here's SmartCompany's guide to 2012, sector-by-sector.
Advertising and marketing
Ben Willee, of the advertising agency Spinach, expects this year to be better than 2011, particularly if unemployment doesn't worsen and the US economy picks up.
Noting that advertisers pick up changes in mood about three months before the broader economy, Willee says it's "not a disaster out there".
And despite the well-publicised blues in retail, Willee notes that the sector – the largest advertiser of all – reduced its advertising by just 2% in the year to September, and the next biggest categories of banking and finance, and automotive are also healthy.
"All the factors and subgroups, it's poised to go; it's just a question of when it does go," he says.
But there's a caveat: petrol prices have a "massive" influence on consumer sentiment, disproportionate to whether a price rise actually hurts the driver's bottom line.
Strong economic growth in China, India and other Asian countries will likely support soft commodity demand, Australia's chief agricultural forecaster says, but the value of exports will grow by 6.6% in the year to June 2012 – down from 12.8% growth the year before.
The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) says lower export prices for wheat, sugar, beef and veal and some dairy products are expected to offset forecast price increases for rice, soybeans and wool.
"Export earnings for farm commodities are forecast to be around $34.6 billion in 2011-12, a rise of 6.5% from $32.5 billion in 2011-1," it says, tipping higher earnings for wheat, wool, canola and meat. Rice and raw cotton in particular are expected to skyrocket by 377% and 63%.
Meanwhile, ANZ is bullish on rural exports, saying this month that the farm sector is "set for a run of two to four years of favourable crops as a result of significant rainfall over the past years".
But there's a catch: the carbon tax is estimated by ABARES to hit dairy farmers particularly hard. It estimated in December that the average dairy farm would lose $4,200 in the first year of its operation, due to the high level of electricity required to run a dairy farm.
Construction and engineering
Builders aren't feeling too flash. Master Builders Australia says they aren't seeing any pickup in private sector demand to replace Government economic stimulus program, and the Housing Industry Association tips weaker new home buildings this year and a flat result for renovations.
According to HIA chief executive Harley Dale, there are four main factors leading to fragility – high interest rates, cautious households, a dire lack of finance for residential developments, and supply problems such as slow land release and planning delays that increase costs.
But Brian White, chairman of real estate company Ray White Group, says there's cause for optimism, pointing to a rise in activity after the November and December interest rate cuts, plus booming sales in Western Australia, New Zealand and its rural unit.
Still, ANZ is not convinced the November and December rate cuts – and the prospect of a third in February – will set things right. It says underlying housing market weakness will continue to weigh on building activity through 2012.
And the latest housing figures are mixed: the latest official job numbers show that job vacancies in construction slumped from almost 24,000 to 13,000 in the three months to November. New home sales lifted by 6.8% in November, but remained well down year-on-year.
Financial services and insurance
Despite posting record profits last year, the banks continue to warn of the fragility of the global economic outlook.
The Australian Bankers' Association chief executive Steven Münchenberg says 2012 will be overshadowed by the ongoing debt crisis in Europe and the uncertainty of what that means for the global economy.
"Our priority will be to make sure our banking system remains solid and healthy, and that we continue to keep Australian savers' money safe and continue lending to businesses and the economy," he says.
"More immediate challenges will be balancing the higher costs of raising money overseas with interest rate expectations and managing the wave after wave of regulation hitting the industry."
More pressing for the sector's staff will be job cuts, as local banks (such as ANZ) pare back their workforce and European banks (such as Royal Bank of Scotland) retreat to their home turf.
Elsewhere, the latest performance of service index, from the Australian Industry Group and Commonwealth Bank of Australia, showed growth in finance, insurance, property and business services, in contrast with weakness in consumer-related fields.
Health and pharmaceuticals
An ageing population and the retirement of baby boomers will put a rocket under this sector for years to come, providing ample opportunities for entrepreneurs and businesspeople.
This was acknowledged in a report by the private equity body AVCAL, released last month, which nominated healthcare as a target area for growth, driven by "strong underlying macro trends in the sector".
Meanwhile, an IBISWorld report into the $12 billion Australian pharmacies industry – including health and beauty – has tipped annual industry growth of 2.4% for the next few years, reaching $13.72 billion by 2015-16. This compares with 1.9% growth over the past five years.
"In the near-term, industry growth will be driven by an ageing population," the report says.
"Long-term underlying economic, demographic and social trends [also] bode well for the industry. In particular, an ageing population, changing community attitudes to health and skin care, various psychological motivations and ongoing product development and innovation are expected to contribute to the continued moderate growth of the industry."
But it's not all clear sailing: IBISWorld says Australian growth rates will be linked to Government subsidies for prescription medicines.
According to technology analysts Gartner, business spending on IT will edge up by just 1.9% this year to $61.9 billion, after a rocky few years and driven in part by growth in cloud computing.
As principal research analyst Derry Finkeldey told StartupSmart, tension over the global economic outlook was stemming optimism, but "often the outlook in Australia is quite cautious but spending ends up being a little bit higher".
Internet and telecommunications
It was only eight months ago that Internode chief executive Patrick Tapper described conditions for telcos as the most volatile he's seen in his 13 years in the industry.
By the year's end, the mid-tier internet service provider had inked a deal with fellow ISP Internode. The $105 million merger created the country's second-largest provider of DSL services and third-largest provider of fixed-line services behind Optus and Telstra.
Explaining the merger, Internode managing director Simon Hackett said that the merged entity would be better placed to compete in a National Broadband Network era that was "all about scale".
Indeed, telco experts expect more acquisitions as ISPs bulk up before the NBN becomes ubiquitous.
But beyond consolidation, the other trend for telco providers is the soaring popularity of smartphones and tablets.
If the latest manufacturing survey is anything to go by, the sector is expanding – just – rather than contracting.
The index, from an Australian Industry Group and PricewaterhouseCoopers survey of 200 manufacturers, rose to 50.2 in December, from 47.8 the previous month – 50 being the dividing line between expansion and contraction.
PwC's head of industrial products Peter Le Huray noted that "pockets of strength" remained in the out-of-favour sector, adding that "efficiency and productivity improvements" leave manufacturers better placed to ride out a possible global economic downturn.
Still, the Reserve Bank has noted that Australia is undergoing a "structural adjustment"; outgoing AiG group chief Heather Ridout points to the challenges of the high dollar, soft domestic demand and the uncertainty in the global economy.
"The sector remains vulnerable to any renewed downturn in the global economy and to the underlying structural pressures associated with strong commodity prices," she said.
Indeed, official figures show the number of mining jobs lifted by 21% the fourth quarter in 2011, whereas manufacturing employment lost 4.4% to 953,500 people.
I have a theory: there's a whole bunch of gloomy stories in the media partly because its workers mistake weak trends in their own industry for economy-wide blues.
Yes, newspapers are no longer the employers they used to be and the media is no longer among the nation's top 15 employers. But on the plus side, there will be new publications and employers this year, such as the Graeme Wood-backed Global Mail, and perhaps an Australian version of the Huffington Post.
Online ventures are expected to get a greater slice of the advertising pie throughout 2012. Marcus Phipps, lecturer in marketing at the University of Melbourne, expects advertisers to follow Myer's lead in realigning strategies to be more internet-focused.
"More traditional forms of advertising such as television and radio are likely to remain relatively stable as long as there is not another significant financial shock to the marketplace," he says.
Ben Willee of advertising agency Spinach adds that magazine will likely face a tough task, because consumers are more likely to think they don't have time to read them or think the same content can be found online, and marketers don't like their long booking times.
Resources and energy
Booming. In a recent economic note, ANZ said that the mining investment boom and associated infrastructure and services spending will "buttress overall economic growth and employment, especially in Western Australia, Queensland, the Northern Territory and South Australia".
"The 3,000-5,000 new jobs per month that the pipeline of mining and infrastructure investment will create – based on BHP's estimates – will make a very significant contribution to keeping Australia's unemployment rate very low."
"The value of capital investment from this sector alone is expected to grow by 70% in 2012, reaching 5.5% of GPD (up from 3.4% in 2011 and 2.2% in 2007)."
"This resources-related and infrastructure construction activity (including on-site and along major freight transport lines and hubs) will push total business investment growth up to around 20% year-on-year in 2012. It is expected to dominate the investment (and probably the employment) landscape for the next few years."
But UBS is not so upbeat on the outlook for commodities: it says the macroeconomic risks for 2012 point to a year of lower prices.
"The positive structural drivers of the past decade's commodity super cycle are still present, but have deteriorated," it says.
"A cyclical downturn in global growth, possibly recession, will highlight the lack of policy options now available to the developed economies."
"Cyclical sensitive energy and metals have downside from current levels."
"Copper in particular is exposed as it is trading at a price close to double marginal cost, while the oil market will be exposed to higher supply from Libya."
"Gold is unlikely to resist the broadly declining price trend completely, but should benefit from any further quantitative easing."
Australian Retailers Association executive director Russell Zimmerman says Christmas and post-Christmas figures will likely meet low expectations for 2.6% growth, but expresses concerns that wet weather through summer will worsen difficulties in the clothing and footwear category.
"Generally speaking, we're probably in for a fairly tough period," Zimmerman says, tipping a 2.3% to 2.4% rise this year.
"Obviously we've had two interest rate decreases and I'd expect a further decrease in February, but I am also aware that money is costing the banks a lot to finance themselves from overseas."
The first survey of retailers this year also showed sales and profits expectations among retailers were lower than the previous year, although sales expectations had lifted from the end of 2011.
The Dun & Bradstreet national business expectations survey noted that retailers were increasingly concerned about the threat of online and the global economic turmoil. Fifty-five percent of respondents said slowing demand was their number one concern.
Michael Fingland, managing director of business turnaround firm Vantage Performance, says retailers will feature heavily in insolvencies this year, noting many had been reluctant to hold on to leftover Christmas stock and reduced volumes among transporters.
Still, plenty of international retailers reckon there's money to be made here. There are expectations that Japan's Uniqlo and Swedish fast-fashion group H&M will enter Australia this year, and Topshop is set to open its second Australian store in Sydney later this year.
Tourism and leisure
With the Australian dollar reaching record levels against the euro, local tourist operators will have further competition for visitors beyond recent international hot spots like New York, and most likely fewer Europeans willing to holiday in relatively expensive Australia.
The Westpac-Melbourne Institute consumer sentiment survey in December found that the proportion of travellers planning to go overseas was at its highest level ever.
The bank says Australia's tourism industry faces three main problems: "fewer Australians taking holidays, a bigger leakage of domestic demand into offshore markets and lower inbound arrivals."
Neil Chambers, deputy CEO of the Victorian Transport Association, says it's a mixed bag for transport: those working in the manufacturing sector are in for a "middling to no good" year, whereas those servicing the mining sector and in export and import are in better nick.
Even so, Chambers says small- and medium-sized transport businesses – and it is a cottage industry – can struggle to compete. "The whole shape of the market is changing; the big are getting bigger and the small are finding it more difficult," he says.
Challenges include compliance costs, the new occupational health and safety laws, the lack of Government investment in infrastructure and the upcoming carbon tax.
A few groups, from broker CommSec to real estate agents Raine & Horne, are tipping 5% growth in 2012 after slight falls nationwide last year.
This prediction is based on investors and first home buyers returning to the market, spurred by the recent interest rate cuts and the view the market is undersupplied.
RP Data, meanwhile, reckons the "soft conditions" could persist although "conditions will be better than those in 2011. We forecast that growth will be limited with values potentially falling further in certain areas."
And as ANZ has pointed out, immigration is picking up again, which should support rents and the overall housing market, particularly lower-priced housing.
So while the consensus seems to be flat prices or at best muted growth, one market participant – Aussie Home Loans founder John Symond – has an (albeit unlikely) idea: that the Government bring back the first home buyers boost to stimulate the market ahead of next year's election.
"Probably my cynical self says six to 12 months ahead of the next election, it would not surprise me that the Government might stimulate housing by helping first home buyers and they may possibly introduce a bonus or a boost to the first home owner's grant," Symond said earlier this year.