Channel chiefs and economists have warned that while GFC2 might not be upon us, business confidence is about to get a buffeting.
Their warning comes with several worldwide economies including the US, Greece, Ireland, Portugal – and potentially Spain and Italy – facing significant problems as debt levels continue to erode confidence in Government bonds.
Standard and Poor’s (S&P) went as far as to put the US’ bond rating of AAA on watch last week following a ‘small’ risk of the nation defaulting. The follow-on effect to the local market is both good and bad. The keyword – whichever way you look at it – is caution.
Annitel chairman and managing director, Peter Kazacos, said Australian staff of multinationals could be the victims as global operations tightened and pulled back to home territory to sit out the tougher economic conditions.
In addition, consolidation in the global market could result in an organisation operating in Australia being acquired. This also often led to local staff cuts.
But it could be a positive for the local marketplace where skills demand is far exceeding current supply, Kazacos claimed.
Australian organisations would also benefit from competing with fewer multinational corporations.
“With investment being constrained, some organisations, especially smaller ones, will not be entering into our geography and competing in the short term,” he said.
However, Data#3 managing director, John Grant, said, as we exist in a global economy, local organisations should still prepare for a new wave of challenging conditions.
He had an analogy for the current economic climate: “It’s like driving in a car very fast and then having a car crash where the airbags were deployed. We got out with a few bruises and scratches, but were otherwise okay. So we got into another car and continued to drive at the same pace, only this time we’re headed towards a wall without airbags to deploy.”
The measures being taken by the struggling economies including bailout packages for Ireland and Greece, and a lifting of the debt ceiling in the US, are stop gap solutions to a deeper problem, Grant said.
Governments are running with too much debt, and it is a practice no more sustainable with Government than the behaviour would be for corporations, he said. And as the US pulls back some of its spending and debt, the follow-on effect will impact on Australian business.
“The US is by far the largest consumer of global exports, and a large percentage of that comes from China and India,” he said. “The follow-on effect if the US stops importing on Australia’s own exports to South-East Asia will be significant.”
With Australian business confidence already brittle, it would take just a drop in the resources industry to have a considerable impact on the broader local economy.
That said, Grant is confident there are ways to manage through the difficult times ahead. Using his own company as an example, he is confident of its position. “We haven’t over invested,” he said. “Data#3 is debt averse, and we believe there is opportunity in sectors that have been decimated of major players.”
From the economist’s point of view, the current tension in the market should cool down.
JP Morgan economist, Ben Jarman, said the US is set to raise the debt ceiling, allowing it to meet its obligations, and new rounds of funding to the Greek Government will help cool tensions in Europe.
“Despite the headlines the Eurozone as an aggregate is performing well,"Jarman said. "We don’t think the crisis will broaden at this stage.”
However, echoing Data#3’s Grant, the measures being taken are only having the effect of ‘kicking the can down the road’, Jarman added, as the International Monetary Fund (IMF) takes measures in places such as Greece to stave off the need for debt restructuring, which would be ‘very disruptive’ to the global economy.
Much as organisations that import and distribute technology to clients should be wary, Australian exporters will also feel the bite of the deepening economic crisis as well.
Newport Capital chairman, Lou Richard, said that while Australian banks are keener to lend, and the domestic market is doing well in terms of volume, the global economic environment will still make it difficult for exporters.
Give Europe/US a miss
“I wouldn’t promote going into the US or Europe unless you’re operating within a vertical with a hot innovative technology,” Richard said. “If you’re just offering accounting software and want to head over to Boston? No way.”
And indeed, Austrade, in recognising this, has increased the number of people on the ground helping organisations establish presences in Africa, South-East Asia and South America, as opportunities for new investment in the US and Europe dry up, according to the Australian Institute of Export general manager, Peter Mace.
“There’s been a significant drop in profit margins on account of the dollar’s increase in value,” he said. “Most of the activity with growth is in Asia, where the pricing is better.”