Directors brace for a hard year
- Date:16 Nov 2011
- Type:Media Release
Business is expecting a difficult year ahead according to the latest Directors' Sentiment Index from the Australian Institute of Company Directors.
The Index, a key sentiment indicator measuring the opinions and future intentions of the director community, dropped by more than 32 points for the second half of 2011, reflecting a pessimistic mood permeating Australian business.
Almost every major component of the Index measuring the views and expectations of the director community on the economic and business environment has experienced significant deterioration. Optimism on business conditions, for example, has dropped from 153.4 to 100.3 since the last survey released in April, while the index of economic indicators has fallen almost 25 points from 72.2 to 47.3.
Australian Institute of Company Directors CEO and Managing Director, John Colvin, said the Index makes it clear that there are some serious structural and perception issues that need to be addressed if the Australian economy is to remain on track.
“It is not surprising to see the overall Index dropping, as economic and market indicators have plummeted across the board. We have experienced a challenging six months, with a number of major shocks to the global economy and financial systems, such as the economic difficulties in US and Europe, global fears of a double dip recession and gloomy forecasts for Australian non-resource industries.”
The negative sentiment is apparent in the 55 point dip in the 'net balance' measure of the health of the Australian economy over the next twelve months, with nearly 60 per cent of directors expecting a sustained weakness during that period. The downward trend also shows in the confidence directors have for the near future performance of the Asian, US and European economies – drops of 24, 32 and 18 points respectively in the net balance measures.
The continuing downward trend in global financial markets and restrained consumer confidence in Australia have also added to the sombre picture, with a 42 point drop in the expectation of wages growth and a 25 point drop in the expectation of a higher inflation rate.
The business outlook over the next year also suffered from the overall dip in confidence, dropping 47 points to a net balance of -16, with more than a third of directors expecting things to get worse. They were also more pessimistic regarding credit availability for the next 12 months, in particular for investment purposes.
Given the sombre economic outlook, it was not surprising to find that directors expected the RBA official cash interest rate to fall, with expectations for the next twelve months clustered around 4 per cent and 4.5 per cent. There were also lower expectations of profits for the first half of this financial year, across all facets of business. However, a large proportion of directors continued to expect stability across their business, particularly in the area of business exports and outsourcing.
While 50 per cent of directors expect a rise in the ASX All Ordinaries index over the next year, this number is down from the 74 per cent who held this view in the previous survey.
Mr Colvin said that the surveyed company directors attribute some of the pessimism to the extent of regulation and personal liability they are currently faced with.
“This survey recognises that growth of regulation and administrative compliance costs and the lack of co-ordination on regulatory reform across state and federal jurisdictions has been a huge and costly problem for business.”
More than 70 per cent of directors believe that the level of „red tape‟ has increased in the last twelve months, and almost three quarters expect further increases in the next year - a considerable jump on the 66 per cent that were expecting an increase in the previous Index. Fifty seven per cent of directors felt that the current governance regulations were too onerous.
“The Index confirms that red tape distorts the smooth operation of the market, slows up the engines of growth and job creation and stifles wealth creation in the economy. We are facing an accumulation of laws impacting business which is beyond any reasonable need and is now dysfunctional,” said John Colvin.
“Directors believe that cutting back existing red tape is a crucial part of the Government's economic task, and a key element of the agenda for boosting national productivity.”
“More and more directors are telling us that that director liability is harming their willingness to serve on boards, and the results back that up,” Mr Colvin said. “More than half of the directors surveyed said that Commonwealth and state liability legislation is negatively affecting their willingness to accept new board appointments, with 51 per cent saying the same about legal judgments.”
About the Directors’ Sentiment Index
The Directors' Sentiment Index is a biannual survey of company directors. The November 2011 Directors‟ Sentiment Index survey was conducted with more than 500 Australian directors, senior executives and managers of medium to large private, public and Not-For-Profit sector organisations between 8 August and 31 August 2011.
The Directors' Sentiment Index canvasses directors‟ views on current and future economic and business conditions, as well as key regulatory, governance and public policy issues and weights their responses to obtain an overall indication of director sentiment.
For further details please contact: Ian Zakon, Media and Government Relations Advisor,
(02) 8248 2786, izakon@companydirectors.com.au
The Director Sentiment Index Research: Executive Summary (November 2011) provides a summary of key findings.
Download the above media release, 'Directors brace for a hard year (PDF 141 KB).
For more information, see Director survey reveals key challenges for next year.
For background information, see Director Sentiment Index.