NATIONAL CEO SURVEY Business Prospects for 2019

The Australian Industry Group

NATIONAL CEO SURVEY Business Prospects for 2019

Leadership needed as economy softens

January 2019

Business prospects

JANUARY 2019

The Australian Industry Group

ABOUT Ai GROUP

The Australian Industry Group (Ai Group) is a peak employer association which together with partner organisations, represents the interests of 60,000 businesses employing more than 1 million Australians. Ai Group members are from a broad range of industry sectors including manufacturing; engineering; construction; food and beverage processing; transport and logistics; information and technology; telecommunications; labour hire; and defence. Ai Group is a leading advocate for government policies that are in the best interests of business and the community. With more than 250 staff in offices across Australia, we are recognised leaders in policy research and advocacy in areas such as workplace relations, education and training, energy, trade, taxation and regulation. We promote industry development, employment and stronger Australian communities.

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AUSTRALIAN INDUSTRY GROUP CONTACT

Peter Burn Head of Influence and Policy Australian Industry Group 51 Walker Street North Sydney, NSW 2060 Australia Tel: 02 9466 5566 The Australian Industry Group, 2019 The copyright in this work is owned by the publisher, The Australian Industry Group, 51 Walker Street, North Sydney NSW 2060. All rights reserved. This work is covered by copyright. No part may be reproduced or copied in any form or by any means (graphic, electronic or mechanical) without the written permission of Ai Group (except as legally allowed for media purposes, personal and educational use).

Australian Industry Group

CEO Business Prospects 2019

CONTENTS

FOREWORD...........................................................................................................................................2 KEY FINDINGS....................................................................................................................3

1. Australian Economy and Business Conditions in 2018.........................................................5

1.1 Australian economy in 2018........................................................................................5 1.2 Business conditions in 2018.......................................................................................11

2. Australian Economy and Business Outlook in 2019............................................................15

2.1 Australian economic outlook in 2019.................................................................................15 2.2 Business expectations in 2019....................................................................................17

3. Opportunities and Challenges for Business in 2019.............................................................23 4. Global Competitiveness of Australia's Business Environment in 2019...................................25

4.1 Global outlook, challenges and risks in 2019..................................................................25 4.2 Australian dollar and Australian global competitiveness in 2019.........................................28 4.3 Recent trends in Australian trade.................................................................................32 4.4 Australian business expectations for trade in 2019..........................................................35

5. Planning and Strategies for Australian Businesses in 2019..................................................37

5.1 Business investment priorities in Australia.....................................................................38

APPENDIX: CEO Business Prospects Survey 2019 Participants and Questionnaire.....................39

Australian Industry Group

CEO Business Prospects 2019

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LEADERSHIP NEEDED AS ECONOMY SOFTENS

Ai Group's 2019 Business Prospects survey reads like a report card comment for a weak student: "Could do better". In this election year, the serious challenge for Australia is that to do better we have to lift our ambitions and not settle for good enough, which currently seems to be the case. We need more decisive action from Canberra in a range of areas including workplace relations; energy policy and delivering a better trained and more fit for purpose workforce.

The Business Prospects report finds that Australian Chief Executive Officers (CEOs) expect further growth in the year ahead, but for the slowing of activity that began late last year to continue in 2019 due to a mix of local and global factors.

The report identifies key risks for businesses inside Australia including: uncertainties surrounding the Federal election; concerns over the workings and direction of our workplace relations arrangements; the threat of rising barriers to global trade; the impacts of the housing market downturn; consumer caution; high energy prices; and the continuation of drought conditions in many parts of the country.

Expectations for 2019 point to moderate lifts in production, sales and employment and for a modest pickup in inflation and wages. The 2019 slowdown is anticipated to see activity drift downwards rather than fall precipitously.

This outlook is far from inspiring. While a healthy proportion of the anticipated slowing can be attributed to global factors including heightened trade tensions, geopolitical risks, the slowing of the European recovery and an easing of industrial activity in China, there are a range of factors that are well within our own control that are not attracting the policy attention they deserve.

Rather than simply drift with the international tide, Australia should be proactively building on our relative strengths to lift our economic potential and our domestic living standards. Key policy areas ripe for action include:

developing the skills of the current and future workforce;

developing a stable, effective and bipartisan approach to energy policy to secure the investment needed to reduce price pressures and uncertainties over supply;

removing the administrative obstructions that are preventing the approval of the enterprise bargaining agreements that were once the foundation of strong productivity and sustainable wages growth;

investing in developing the domestic business capabilities needed to build more world-class enterprises invested in trade, innovation and high-performance workplaces; and

committing to improving the effectiveness, fairness and competitiveness of our national taxation arrangements.

Words like modest, soft and flat should be ringing alarm bells for policy makers. The coming election is a real opportunity for our political leaders to lay out an agenda for the future which focuses on strong growth and targeted investments that will deliver long-term benefits to our community.

Innes Willox

Chief Executive, Australian Industry Group Australian Industry Group

CEO Business Prospects 2019

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KEY FINDINGS

2018

CEOs viewed 2018 as a year of two distinct halves. The first half of the year saw a welcome acceleration in business-output, sales, employment and investment in response to improving global and local conditions. The second half of 2018 saw some of the shine come off as the pace of improvement eased and as the global and domestic outlook become more uncertain.

Notwithstanding the relative health of the US economy, global growth decelerated over the course of 2018 under the weight of heightened trade tensions, geopolitical risks, the slowing of the European recovery and an easing of industrial activity in China.

For the year as a whole, Australia's growth looked relatively resilient and more broad-based than in the past, with a greater range of locations and industries growing their output and employment in 2018. This was supported by strong export earnings, high levels of public sector spending and investment (e.g. for large long-term programs such as the National Disability Insurance Scheme and urban transport infrastructure expansion and renewal) and relatively robust population growth. As the year wore on however these positive factors were countered somewhat by ongoing weakness in consumer spending and business investment, long-term weakness in productivity growth and, more recently, by a shift downwards in residential property prices and residential and commercial construction activity.

While 2018 was a better year for many Australian businesses, it was not the stellar year for which they had hoped. One third of CEOs said their general business conditions improved in 2018 versus one quarter who saw a deterioration, relative to the previous year. For many businesses, higher input costs - and especially higher energy costs - ate into margins in 2018, detracting from the benefits of the increases in output and turnover they were able to generate, and reducing their ability to invest. Thus, this year's annual Ai Group survey of Australian CEOs indicates that although 57% of CEOs reported an increase in turnover in 2018, non-mining profits were flat with only 41% of businesses surveyed improving their profit margins and 39% reporting a fall in margins in 2018.

2019

CEOs expect 2019 to be a touch slower for Australian businesses than was experienced in 2018. This reflects the very recent deceleration that is evident across local and global indicators in recent months plus the increasing range of risks on the horizon. This moderation in the outlook is apparent in the economic forecasts as well as in business leaders' expectations, plans and strategies.

Heading into 2019, Ai Group's annual CEO survey reveals fewer business leaders are feeling optimistic about their general business conditions in 2019 than was the case one year ago. Indeed, on a net balance basis (optimists minus pessimists), fewer CEOs expect an improvement in business conditions in 2019 than in any year since 2015. This largely reflects their experiences in 2018 and especially the second half of the year.

In this year's Ai Group CEO survey of Business Prospects:

General business conditions are expected to be better in 2019 for one third of CEOs, which is a lower proportion than had expected an improvement for 2018 (42%) but similar to the proportions of CEOs who had expected better business conditions for 2017 (33%).

One quarter of CEOs expect their business conditions to deteriorate in 2019, which is the highest such proportion since 2014 (35% of CEOs surveyed at the end of 2014 had expected worse conditions for 2015). On a `net balance' basis (optimists minus pessimists), 7% of CEOs expect better conditions in 2019, which is the lowest such net balance number since 2015.

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CEO Business Prospects 2019

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