Australian Businesses Struggle with Revenues and Costs, Eyeing Cost Cuts

Australian businesses are under pressure with declining revenue and rising expenses, particularly in wages, pushing many to consider cost-cutting measures. Recent reports from consulting firms Deloitte Access Economics, investment bank JP Morgan, and the National Australia Bank highlight these challenges.

Australian Economy Suffers Sluggish Growth

The slowdown in the Australian economy has significantly affected business revenues. Official data shows that the country’s gross domestic product (GDP) grew by a mere 0.8% over the 12 months ending September. Sheraan Underwood, an economist at Deloitte Access Economics, explained, “The slowdown in the Australian economy has hit business revenues, especially those dependent on discretionary consumer spending, such as hospitality and retail.”

Increasing Operating Costs

Operating costs for businesses continue to rise. Labour costs remain above their long-term average and are expected to persist through 2025. Non-labour costs like energy and insurance are also on the rise. Given the difficulty in raising prices further, firms are exploring alternative ways to maintain profitability. According to Underwood, “Businesses are now responding by implementing cost-cutting measures.”

Employers Struggle to Find Workers

Despite these cost pressures, National Australia Bank’s Quarterly Business Survey indicates ongoing labour shortages. Employers continue to report difficulties in finding the right workers, with wage costs being the primary issue affecting business confidence. Other key concerns include pressure on margins, demand, and the availability of labour.

Forecasting Unemployment Difficulties

Analysts at JP Morgan warn that forecasting the unemployment rate has become challenging due to increased “marginal attachment” to the labour force. This detachment often occurs when people leave jobs but are yet to start new ones. “This volatility makes it hard to discern underlying conditions around the turn of the year and adds complexity to monetary policy outlook,” explained JP Morgan economist Tom Kennedy.

Potential for Higher Unemployment

Despite these uncertainties, analysts believe the unemployment rate is likely to drift slightly higher in 2025. This could trigger a slight easing of monetary policy, with interest rates potentially decreasing. However, the timing and extent of these rate cuts remain uncertain, impacting both business conditions and confidence.

Disinflation Continues

While cost pressures remain, they are not worsening, and demand is weak. The National Australia Bank survey suggests businesses do not anticipate inflation re-accelerating in 2025. This stabilisation may indicate that businesses are passing the trough of sluggish growth. NAB expects this to pave the way for lower interest rates, although uncertainty may continue to influence the rate of cuts.

Uncertainty Hampers Investment

Deloitte Access Economics notes that economic uncertainty has more than doubled from a recent low in early 2024. This trend, exacerbated by economic disruptions like the global financial crisis and the pandemic, impacts business investment and household spending. Sheraan Underwood commented, “Uncertainty has a negative effect on economic growth by delaying household spending and business investment.”

Policy Recommendations

To address this issue, policymakers should aim to reduce uncertainty. Strategies include increasing transparency, creating well-designed institutions, and enhancing communication. These actions can help guide market expectations and support stronger economic growth. Underwood advised, “Greater transparency, well-designed institutions, and strong communication can help to better guide market expectations.”

Conclusion

Australian businesses face a challenging landscape with reduced revenues and increased costs, particularly in wages. As they prepare to implement cost-cutting measures, the ongoing labour shortages and economic uncertainty pose significant hurdles. Policymakers must work to reduce uncertainty and provide a fertile ground for economic growth and investment.

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