Hidden road to business confidence recovery

As new data shows Australian business confidence plummeting amid macroeconomic pessimism, the productivity levers that could unlock further growth are lying idle.

Today we released our fourth consecutive annual report on business confidence, ‘Managing in Uncharted Waters - Current State of Play 2012-13,’ which shows that business confidence is continuing to plummet across Australia and New Zealand and the broader region.

Our report’s findings suggest that falling business confidence is driven mainly by uncertain global economic conditions that show little sign of improving in the medium term and carry ongoing risks to the Australian economy. The economic crisis in Europe could easily spiral out of control should countries like Greece and Spain drop out of the European Union. Additionally, China’s slowing economic growth has driven coal and iron ore prices down, possibly ending the mining boom.

Our report shows that in the face of these pessimistic conditions, Australian and regional businesses have become risk averse, focused on costs and have decided they cannot maintain growth through increasing prices. They are reluctant to invest through taking on debt. The business sentiment when our first survey was conducted in 2009 at the height of the GFC was relatively positive and upbeat, with many business leaders thinking that Australia had dodged a bullet and that there was life after Lehman Brothers. In the past three years, it has become clear that though life has gone on, it has profoundly changed and confidence has fallen as the global outlook has soured.

Alongside this, respondents have taken the view that they will receive little support from a federal government that seems focused on policy rhetoric rather than genuine policy reform and direct action. The lack of vision about Australia’s economy has driven the view that the government is not interested in business needs and fails to link business performance to the nation’s sustainable economic performance, living standards of its citizens and the government’s ability to fund the services it aspires to.

As our report suggests, productivity has become a significant avenue for business leaders to improve business performance. Multi-factor productivity, which draws in capital as well as labour to business performance, is becoming a focus for many businesses. Getting more out of the people and capital deployed is a powerful way of surviving and prospering in difficult times. Techniques such as a more active management method, a broadening of skills in the business, and constantly reviewing and adjusting key measurements of business performance are examples of actions companies should be taking to improve productivity.

Productivity is discussed almost daily in the business and national media these days for good reason. If you can produce more for the inputs you use, revenue flows mostly to the bottom line or to customers in the form of price restraints securing the future of your business.

The government has levers it can pull to help businesses improve productivity but the overwhelming business sentiment towards government is almost universal – they won’t pull their weight, or deliver on policy commitments that will bring about real and effective change. The one thing that business has been asking for repeatedly is a more flexible approach to employment laws which would enable the business community to experiment, take risks and change its processes and services in order to lift performance.

Labour market flexibility is mirrored in the rhetoric about class warfare. Businesses in dire need of change such as Qantas are hindered at every turn and are becoming increasingly vulnerable to lean and aggressive competitors, forced to resort to tricks such as grounding its entire fleet and splitting up its operations in order to navigate a way through the obstructive behaviour of the government and the unions.

Our message for business leaders is simple. While the business and economic outlook remains uncertain, focus more on risk than growth, cost reduction than revenue expansion and a reduction in exposure to debt. While key challenges faced by businesses are outside the direct control of Australian companies, policy paralysis is not helping.

David Hand is managing director of Newport Consulting.