The gaming industry should remain relatively stable, despite declining discretionary spending. The real victim is tourism, which will almost certainly be in need of a miracle during 2009.
While the Australian dollar and oil have plummeted, deteriorating economic conditions worldwide should keep most people at home. With international short-term visitors falling by 5.1% from November 2007 to November 2008, the industry is hoping domestic tourism may be the saviour.
Local airlines will attempt to take advantage of this by offering cheap flights and travel agencies are likely to offer more “package” type holidays at cheaper prices to stimulate the market.
But according to an Australian Financial Review report, banks, law firms and corporations are cutting travel budgets. Chief executive of travel agents Corporate Travel Management, Jamie Pherous, says activity is down.
“We understand the corporate travel industry is down between 15% and 20%. There is a decline in activity and a movement to people buying cheaper fares than they used to.”
The outlook for the manufacturing sector remains grim. While falls in interest rates, oil prices (oil is a key ingredient in many chemicals and plastics) and input prices (such as steel) have provided welcome relief, deteriorating demand is weighing heavily on the sector’s prospects.
Activity in the sector fell for the seventh straight month in December, according to a survey from the Australian Industry Group, and the outlook for forward orders and inventories is also poor.
AIG chief executive Heather Ridout is bracing for a tough year marked by production cuts and job losses. Like many business leaders, she will be looking for more government spending to help stimulate demand.
Another complication for the manufacturing sector is the renegotiation of around 1000 enterprise bargaining agreements in the first half of the year. It will be crucial for employers to keep wage increases to a minimum if they are to protect margins over the next 12 to 18 months.
It’s getting ugly for Australia’s media sector, as consumers stop spending and companies stop advertising. Late last year, Goldman Sachs JBWere’s team of media analysts downgraded their outlook for the sector for the third time in just four months because of the worsening economic outlook.
“There is little doubt that global growth expectations continue to deteriorate at alarming speed,” the analysts wrote. “We now assume a deep ad market recession in 2008-09, minimal growth in 2009-10 and a cyclical recovery in 2010-11.”
JBWere is tipping the ad market will shrink by 3.7% in 2008-09 before posting growth of 2.3% in the 2010 financial year, although there are clearly risks that conditions be even worse than this. The company’s analysis of print and radio advertising in the Sydney market over the Christmas period revealed advertising revenue was down by about 7% – a troubling way to start the new year.
Even the fast-growing internet advertising market is bracing for a difficult year, with media agency OMD expecting ad sales growth of 17.4% in 2009, compared with 34.5% in 2007 and 23.5% in 2008.
Property developers and lobby groups tried their very best to start the year on a positive note, claiming that falling interest rates and subdued house prices could tempt buyers back into the market.
And then came the release of building approvals data for November 2008, showing a 12.8% slump in total building approvals and a 21.9% slump in approvals for apartments and units. Any sense of optimism was almost instantly destroyed.
A recent survey by the Mortgage and Finance Association of Australia revealed that almost 60% of homeowners expect the value of their home to fall in the next three months, and most economics and commentators expect they are probably right. The struggling NSW and West Australian markets face another tough year as the economy slows further.
However, economist predictions for dwelling investment in 2009 show small growth, and pressure is likely to be put on governments around the nation to provide more support for the sector. The light at the end of the tunnel is faint, but it is there.
Sharp falls in commodity prices have sent shockwaves through the mining sector, from junior explorers (which find themselves struggling to access funds and looking for merger partners) to global giants (such as Rio Tinto and Alcan, which have shelved expansion plans and slashed jobs).
The sector looks like it’s in for a rocky year. As global growth slows further, commodity prices will continue to dip, resulting in falling sales and shrinking profit margins. Consolidation in the sector looks almost certain, although tight credit conditions could limit the amount of corporate activity.
As with many parts of the Australian economy, the wildcard is China. While the sharp slowdown in the world’s second largest economy has been a big contributor to the fall in commodity prices, Goldman Sachs analyst Malcolm Southwood says the Chinese Government’s stimulus measures should eventually start to work.
“We expect a very weak first half in 2009, but as de-stocking runs its course and stimulus spending kicks in, we believe that China’s second half 2009 demand for raw materials is likely to improve, providing a positive catalyst for resources sector investment.”
Retailers had a reasonable Christmas, with estimates from the Australian Retailers Association putting the total spend for the period at $36.95 billion, just under the forecast of $37.2 billion. But that’s the end of the good news.
The first six months look particularly dire for retailers. As unemployment fears grow, households are certain to cut back on spending even further. To make matters worse, the falling dollar has pushed up wholesale prices, which will force retailers to either raise selling prices (which is likely to further dampen sales) or take a huge margin hit (which will threaten profitability).
Either way, expect the list of retail closures – which already includes EzyDVD, Shoobiz and Kleins – to grow in the first six months of the year.
After that, the outlook is a little better. The executive director of the ARA, Richard Evans, hopes a recovery might start around July.
“Once we start heading into the June-August period, with predicted further rate cuts on the horizon and potentially another cash bonus from the Rudd Government, strong consumer confidence will return with more cash flowing through the retail sector,” he says.
Of course, that will depend entirely on the state of the economy and particularly the unemployment rate. If unemployment spikes, the retail recession could last most of 2009.
The fact that most of the products and services sold by the telecommunications sector are now regarded as commodities is both an advantage and disadvantage for those companies operating in the sector.
On the plus side, demand should remain reasonably steady, although sales to the SME sector are likely to be under pressure as businesses cut back on spending.
On the negative side, telecommunications companies can only really differentiate on price, which means competition will be cut throat and margins will be under severe pressure. Robert Bryant from IBISWorld says the telecommunications reseller will be one of the most at-risk industries in 2009, and predicts a number of smaller players will be forced to consolidate as conditions get tougher.
The transport sector, like the retail sector, is another with fortunes tied very closely to the wider economy – which means companies in this industry are bracing for a tough year.
While the sharp fall in oil prices has helped take the pressure off margins, competition in the sector will only intensify as competitors scramble for a diminishing amount of work. Freight rates, which have fallen sharply in recent months, are likely to fall further in 2009.
All this looks certain to lead to another round of consolidation, particularly among the smaller players.
The airline sector will also be under particular pressure, as consumer spending continues to slump.
Also see the SmartCompany Dun & Bradstreet Industry Growth List for detailed analysis of sectors
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
