When recovery comes, businesses traditionally change their strategies from being defensive to attack. But this time will be different, the market has changed. In some sectors, new low cost providers have emerged, there might be new entrants and some competitors might have merged with others and come out stronger.
Also, during the crisis many companies dropped their prices. No company will be able to lift their prices back in a hurry.
Beaton’s Joel Barolsky says companies need to watch this space carefully in 2011 because the rules of the game have changed. They need to evaluate how their industry has changed. And it will vary from sector to sector.
“It’s not business as usual. What took you to succeed before might require a new set of rules and expectations on how to be successful,” Barolsky says.
The skills shortage which emerged in 2010 will get even worse in 2011. Indeed, it’s likely to have an impact on completely new, and unexpected, sectors of the economy, and these will have to be monitored.
Clarius chief operating officer Kym Quick says the existing trend of shortages in the construction industry and trades, everything from wood trades to automotive, will continue in 2011.
“If demand continues, as I expect it will, and if supply continues to be short, then it will become more pronounced over the next 12 months. Everything we have been seeing will continue, but we will be worse off.”
He nominates three areas where skills shortages will worsen in 2011:
There have been some fundamental changes in consumer attitudes since the global financial crisis. Retailers will confirm that consumer activity is sluggish and their anecdotes of people not buying are supported by Australian Bureau of Statistics data.
Also, there is evidence that instead of spending money, consumers are salting away the money or paying down debt. CommSec chief economist Craig James says that over the past four months, the average credit card balance has been slashed by $39.10, the biggest reduction in credit card debt for over 15 years.
“The warnings about the risk of high debt loads have been getting through and the messages were reinforced during the GFC,” James says.
“Consumers are now more likely to pay off debt with extra savings or put it in the bank.”
He says that consumers have become more conservative, but he tips they will start spending again, albeit it not ostentatiously, later in 2011.
“Consumers are currently focused on saving rather than spending and have more conservative spending preferences. But with wealth levels rebounding, the job market strengthening and provided there is an extended period of interest rate stability, then consumers will indeed spend again. But conspicuous consumption is not ready for a comeback any time soon.”
Companies will have to watch consumer spending patterns carefully.
Economists believe the Aussie dollar will stay near parity with the greenback. But there are doubts as to whether it will go much beyond that. Saul Eslake questions whether the Australian dollar can go that much higher.
“It will be fluctuating around parity with the US dollar,” Eslake says. “The biggest influence on how it gets, both up and down, is what happens to the US dollar and I am not especially pessimistic on the outlook for the US dollar. You have to remember that when you are talking about currencies, it’s a relative price. The US dollar can only go down if there is something else that can go up against it sustainably, and if you look at the world’s other major currencies, it’s hard to see any good reason why the yen or the euro should go up against the dollar. By and large, I can’t see the US dollar going down from where it is now. It might even go up, so I am not sure there is a lot of upside in the Australian dollar against the US dollar.”
He says China’s impact might be something to watch out for.
“If China goes through an inflation followed by a bust cycle, which I don’t think is likely, but I can’t dismiss it as impossible, that could see the Australian dollar taking a hit.”
CommSec chief economist Craig James says currency volatility will have to be watched closely.
“Exporters and importers can’t take their eyes off the currency for a second,” James says.
“Just when you think a new paradigm is emerging, something can come from left field. Note that the Aussie was heading for parity in mid-2008 before the GFC emerged and dragged the Aussie to US61 cents in October 2008. If the US economy was to rebound markedly in 2011 and the Chinese economy over-heated, then the Aussie would quickly lose altitude.” Watch the exchange rate, it will be volatile.
Both will head in one direction, and that’s up. But not drastically. Still, they will have to be watched as both will have a bottom line impact. Reserve Bank of Australia (RBA) assistant governor Philip Lowe claims that Australian consumers might continue with their conservative spending habits for “quite a while yet” which is likely to cap inflationary pressures.
But Saul Eslake believes inflationary pressures are pointing gradually upwards, although the growth will be limited.
“While there are some obvious inflationary pressures like labor costs and utility charges, there are also some disinflationary forces associated with the exchange rate,” Eslake says.
He sees interest rates increasing, but not immediately.
“I don’t expect the Reserve Bank to be lifting them in the next three months. It’s possible they could go at least six months if they need to, but I think by this time next year, the official cash rate and hence the rates borrowers are paying will be at least half a percentage point higher than they are now.”
CommSec’s Craig James expects a handful of rate hikes but warns that other developments might force the RBA’s hand.
“The Reserve Bank appears to be working on the assumption of around two rate hikes in 2011,” James says.
“Economists assume three rate hikes. But it’s important to note that the RBA is already maintaining tight monetary policy and that small changes in rates have a big impact on consumer spending because debt levels are much higher than in the past. We expect cash rates to peak at 5.75% in 2012. Much will depend on the migration policies of the Federal Government. If the Government continues to restrict migration and limit business and working holiday visas, then labour supply may not be allowed to adjust to meet higher demand. Clearly a tight job market increases the risk of higher wages, prices and interest rates.”
Prime Minister Julia Gillard has vowed to bring in a carbon price next year. That will have an impact on prices. But CommSec’s chief economist Craig James says environmental issues are already starting to have an impact on pricing. That will continue in 2011 and will need to be watched carefully.
“Clearly it’s impossible for businesses to factor in potential carbon pricing issues into medium-term strategic plans,” James says.
“Still, all businesses are already coping with a ‘greener’ landscape with policies affecting new building, renovations and maintenance issues. While strict carbon pricing doesn’t currently exist, clearly greener practices are a common feature of the operating environment and serving to lift costs. Carbon pricing and climate change issues are likely to return to the spotlight in the second half of 2011. It’s not possible to make a judgment on likely effects. But any changes that do occur will have long phase-in times. Still it’s important to note that environmental issues are already serving to affect business decisions and costs by stealth.”
The Grattan Institute’s Saul Eslake says a carbon price will affect electricity intensive industries such as utilities and producers of cement and aluminium. The cost increases will be passed on to consumers. He expects price hikes of high single digits and in some cases, double digit price increases.
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