Business balance sheets are looking healthier as economy recovers

Business balance sheets strengthened in the December quarter, according to Westpac’s latest business snapshot -- a sign that the economy has passed its weakest point and is on the road to recovery.

The Westpac Business Cashflow Gauge - a measure of companies' income to expenses ratio - held steady over the quarter and is up 1.7 per cent over the past six months. 

Meanwhile, business deposits grew by 2.6 per cent over the period to be up 7.8 per cent in annual terms - the biggest rise since the pandemic - with both commercial businesses and small and medium-sized enterprises recording solid gains. 
 

“The overall improvement over the past six months is consistent with our view that economic growth has passed its nadir,” Westpac economists Sian Fenner and Pat Bustamante said in the report.

“It appears businesses are looking to build liquidity while also using their balance sheets to invest,” they added.

The Quarterly Business Snapshot, which draws on Westpac data from millions of daily transactions, showed credit growth picked up to 3.6 per cent, from 3.1 per cent in the September quarter.

“Despite a lacklustre economic backdrop, firms continue to invest, focusing on building resilience in supply chains in the face of elevated geopolitical risks and improving cost efficiency,” Fenner and Bustamante said.

Feedback from customers pointed to a greater focus on technology and R&D to improve efficiency, the report found. Specifically, firms are looking to invest in automation and digital transformation projects such as artificial intelligence, cloud migration and e-commerce.

Sector split

Expenses and revenues declined in equal measure (1.1 per cent) in the December quarter, underlining that businesses are coping with sluggish consumer demand by keeping a sharp focus on cost management. 

While a growing number of SMEs are seeing their cashflow improve, there remain pockets of stress especially among consumer-facing sectors. SMEs in general have less scope to pass on higher costs to consumers than larger commercial businesses. 

The biggest cashflow gains in the quarter came in the service sectors including recreation, healthcare and personal and business services. Meanwhile, conditions softened in the education and accommodation & hospitality sector as a result of tighter policy around student visas and households continuing to favour lower cost options for dining and travel.

Cashflow in the construction industry improved for a second straight quarter in a welcome sign that the severely challenging conditions seen in the sector since the pandemic are waning. 

Building materials costs remain elevated, but have stabilised, while the RBA’s first interest rate cut will also be supportive. Even so, demand remains weak, especially outside of government infrastructure investment, with much of the improvement in cashflow down to cost-saving measures. As a result, margins are still being squeezed, the report found. 

Regions converging 

Businesses operating in the mining states of Western Australia and Queensland have outperformed in recent quarters, but the latest report showed some “green shoots” that conditions are gradually starting to converge across the states. 

New South Wales has seen the most challenged cashflow conditions since the pandemic but recorded an improvement in the December quarter and over 2024, Victoria looks to have stabilised, while the mining states are showing signs of leveling off at higher levels. 

Overall, Fenner and Bustamante are confident that the improvement in business cashflow can be sustained in the months ahead. 

“Looking ahead, we expect businesses to benefit from several tailwinds. Cost pressures are expected to ease further, with wage growth projected to moderate further, and underlying inflation to ease to around target.” As a result, Westpac economists also expect more rate cuts from the RBA as the year unfolds. 

Still, they are mindful of the external risks facing the economy, not least U.S. President Trump’s threat of far-reaching import tariffs. Domestically, there is also uncertainty over whether consumers will continue to prefer saving over spending.  

“The cyclical recovery in demand is likely to be relatively modest and possibly uneven. Indeed, the path forward depends on how smoothly the transition from public to private-led expansion unfolds.”

To read the full report, visit WestpacIQ.