South Australian business confidence rose by a reasonable 7.5 points in the December quarter of 2024, despite business costs continuing to climb.
According to the South Australian Business Chamber’s Survey of Business Expectations, released today, South Australian business confidence has risen to its highest level since March 2023. But, lingering high costs of doing business reflects a more challenging operating environment for many South Australian Businesses. 75.1% of respondents voted costs as the most significant issue affecting their operations, 20.3 percentage points more than the second most voted which was profitability/profit margins.
The cost increases and squeeze on business profitability highlights the challenging environment facing so many businesses. On balance, it’s surprising that businesses are more optimistic about conditions than they were last quarter.
Energy price hikes remain a huge part of this, 38.9% of surveyed businesses reported their bills increasing 21% or more in the last year, with 8.1% saying they rose by more than half.
Energy prices are pushing many businesses to invest in generating power as close to where they consume it as they can to decrease their exposure to grid infrastructure charges and minimise electricity costs. 54% of respondents have solar panels installed in their businesses while only 15% of respondents have batteries. I suspect as battery technology improves this will become more widespread, especially among electricity intensive industries.
Another expense that is topical is the price of servicing debt. While it’s certainly not critical for every business, many capital intensive businesses using leverage are feeling the impact of prolonged higher interest rates. For most businesses, while this month’s interest rate cut alone will be immaterial, the change in sentiment among consumers could herald a brighter outlook.
The survey’s Cost of Materials and Cost of Overheads Index both rose in the quarter and remain at near all-time highs and have been elevated for the last couple of years. One of the main issues with the prolonged high-cost business environment is that businesses have already pursued many practicable cost-saving measures across their operations. As a result, identifying and implementing further measures is becoming increasingly challenging. This is perhaps most true of agriculture and manufacturing firms, 86% and 83% respectively voted costs of doing business among their main issues.
After passing on previous price rises to customers, many businesses now looking to increase prices further are meeting resistance, particularly as inflation has eased. As a result, businesses in this space are finding their profit margins are continuing to be compressed. Global trade faces a period of uncertainty and likely volatility in the short term The direct impact of Trump’s tariffs will play out over time, but the indirect impact on our exporters could be interesting. If, for example, competing nations move away from exporting to the US, this may increase competition for Australian goods in other markets and prove challenging.
I do get a sense from many businesses I speak to that there is an appetite for nuclear energy to form part of our energy mix. This isn’t universal, but after years of energy price rises, many businesses wish to see a long-term solution, and while acknowledging the pitfalls of nuclear such as establishment cost, lead times and the politics of it, many clients feel its time has come.
Without a significant improvement in the cost of doing business in South Australia, the small increase in confidence we are seeing will remain fragile.
