nem Business Insights - Post Covid Reality
There is considerable uncertainty creeping into the business landscapes that the firm traverses. These range from very small businesses to major corporations across a multitude of industries in addition to a range of Not-for-Profit organisations and State and Federal Government Departments.
This article has been prepared to share the firm’s observations and views regarding a number of questions that are continually being raised by the businesses we deal with on a day-to-day basis, and who we have done so over the past three to four years.
We expressed the view during the early stages of the Covid-19 period that we all experienced, that this was a bottom-up economic pandemic. While there was an infusion of cash in terms of PAYG credits and Job Keeper the firm saw the harshest impacts affecting those at the bottom of the food chain (so to speak). And this has continued to be the case as inflation has increased, interest rates have risen and the cost of basic necessities such as rent, power and gas have soared.
It is our view that we are experiencing the emergence of a bottom-up recession. If you rent, have a mortgage, are on modest incomes and have children at school you are experiencing considerable financial pressures which is not helped by the continued bad news cycles. Every workplace, no matter how successful the business is, will have employees in this situation.
It is little wonder then that we are observing a heightened level of anxiety and uncertainty about the future across a wide range of businesses, even those that have fared well during Covid and continue to prosper.
Our View of the Economy
Inflation, to a large extent, is not being driven by demand. Supply chain interruptions, government interventions (such as the timber industry and housing stimuluses), the war in Ukraine and a sequence of natural disasters have added significantly to inflation. The unprecedented RBA interventions at the start of the pandemic fanned a housing boom and the lending of billions of dollars to the major banks (at 0.1%) to ensure liquidity have driven the underlying level of inflation and has not been driven purely by consumer demand. The RBA claim to take this into account when undertaking their modelling but they admit their highly sophisticated models are not designed to do this!
And the RBA claims it has only one tool in its toolbox, interest rates, so we expect they will continue to increase rates this year even if they taper off the frequency or size of the rises. We also believe gas and electricity prices will soar as the banks commence repaying their liquidity loans and start having to replace those funds at market prices. This will widen their cost of funds which will cause far more conservative lending practices and more active recovery of any exposures to businesses trading close to their covenants or households with arrears.
And then there will be the inevitable raining in of both State and Federal deficits combined with the re-alignment of industry held CBD commercial property valuations on the back of higher levels of stock and reduced CBD occupancies.
So, we see the emerging bottom-up recession having some major impacts across the entire landscape during the second half of this year and into the first half of 2024.
Current Observations
While most businesses we have contact with are performing well against most metrics there are signs of general slowing across most industries, particularly those that are closer to the end consumer.
Those sectors with medium to long term fixed price contracts continue to provide challenges particularly in the private construction sector. Federally and State funded infrastructure projects appear to present far lower risks for suppliers.
General domestic building activity appears to be slowing. Delays caused by weather, key supply constraints and now the reduced borrowing capacity of mortgage holders have combined to create a slowdown in new residences while home upgrade momentum appears to be slowing as travel has been prioritised over home refurbishments after lockdowns.
There is also a re-alignment of working capital requirements and reduced demand as supply chains return to pre-pandemic metrics and stock holdings are reduced with downstream implications for suppliers.
Those organisations that are highly dependent on Government subsidies and grants are under enormous pressure which is expected to intensify as both State and Federal governments start to reign in their deficits.
Retail is mixed as there is generally high levels of employment. Demand across most levels of hospitality remains strong, and very strong at the luxury levels (which does not appear to be interest rate sensitive) but there is definitely a wide based shift to cheap and cheerful and better value amongst most working and middle-class consumers.
For over two years now the majority of businesses have been constrained by their inability to find or attract suitably qualified employees. Businesses have been doing more (or the same) with less which is difficult to sustain and maintain. So, it is little wonder that we are seeing that a lot of people that the firm is connected to are fatigued. And if we are seeing fatigue amongst the owners and managers of the businesses we deal with, there is a very real prospect that the businesses ecosystem of employees, customers and suppliers are faring a lot worse.
So, while there are wide scale shortages of experienced staff and it is tempting to quickly sign-up experienced employees when they become available the advice of the firm is to take your time. Make sure that the people joining have verifiable work and mental health histories and are the right cultural fit.
Mental health is now the largest and most expensive area of workers compensation claims and is not restricted to traditional high-pressure businesses.
The banks are also starting to be more selective when it comes to new business and while competing aggressively in the residential market there are reports of tightening in business lending across a multitude of businesses.
Being Prepared
The overwhelming view of the Partner Group is for businesses to focus on their core business, be empathetic towards their employees and concentrate on the needs of their customers and clients. There can be no better time than now to assess the underlying fitness of your business.
When we say fitness, we do not mean the health of the business. We mean the cultural state of mind of the business. The health of the business can be measured by the usual metrics of sales, margins, profitability, and cash.
As we advised when we were facing an uncertain pandemic environment our advice to our community of businesses and contacts is to place even more emphasis on the following:
Remain focused on your core business and where you have a competitive advantage.
Cash is still king. Watch your collections, understand your cash flow outlook and be transparent with your bankers.
Look after your key people and while keeping an eye out for the right people do not hire just to fill a position.
While many businesses and competitors will be caught up in the negative press and believe it applies to them, take the opportunity to lift your businesses activity, especially client facing meetings and communication.
Talk to a nem Partner if you would like to know how you can assess your businesses underlying fitness with your own resources, with ours or with a combination of both. We are here to assist and support!
nem Partner Group
March 2023