Many Australian businesses are investing to grow after economic conditions continued to stabilise in the final quarter of FY24.
Westpac Group’s latest business quarterly snapshot shows that topline revenues remained under pressure in the June quarter, as higher average taxes, higher interest rates, and above-target rates of inflation constrained consumer spending.
However, the fall in revenue was largely offset by businesses achieving increased cost efficiencies. The report shows that cash flow conditions went sideways throughout much of FY24.
The snapshot, which draws on data from millions of daily transactions made by Westpac’s business banking clients, also shows that the effort businesses put in to strengthen their balance sheets during, and after, the pandemic is now paying dividends.
One of the unique features of this cycle is that business investment and credit growth have held up even though the broader economy has slowed. While the underlying reasons for this vary - from the record growth in Australia’s population to investing in the energy transition - strong balance sheets have helped to enable this investment.
Many companies used temporary windfalls from government support during pandemic lockdowns, and the strong demand that followed the opening after the pandemic, to pay down debt and build financial buffers. As a result, business liquidity coverage measures are running significantly higher than pre-pandemic levels.
In the June quarter we saw commercial businesses (with annual turnover between $5 and $50 million) use some of this strength to draw down on credit lines and invest. We are seeing economy-wide business credit grow at rates well above the pre-pandemic decade average. These businesses are using equipment and term financing to invest in their capacity, driving much of this growth in business credit.
This is a great thing for a growing economy like Australia. The resurgence in population growth after Australia’s international borders reopened means we need to invest in capital items such as infrastructure, commercial floorspace, IT systems, machines and emerging technologies. This investment will help boost productivity and support real income growth over the long term.
Another feature of the latest snapshot was that smaller businesses (with turnover under $5 million) are finding it harder to pass on their higher costs to consumers. As a result, these smaller businesses are using their financial buffers to boost liquidity and tide them over until the economy, and consumer spending, begins to pick up. Again, this is only made possible by strong balance sheets.
The worst looks to be behind us, and we expect the economy to stabilise before staging a recovery as we progress through 2024 and into 2025. Cost of living support, tax cuts, moderating inflation, and eventually, lower interest rates will support consumer disposable income and spending. This will have positive flow on effects for businesses of all sizes.
To read the quarterly business snapshot in full, visit WestpacIQ.
Pat joined Westpac Group as a Senior Economist in August 2022. He covers a range of topics with a focus on the Australian economy and macroeconomic policy. He has also worked across several business lines, including Westpac Business Bank, St.George Bank, BankSA, Bank of Melbourne and BT. Prior to this, Pat was an economic adviser to the Federal Treasurer, the Hon Josh Frydenberg, during the COVID-19 pandemic. This involved advising the Federal Treasurer on the economy and appropriate macroeconomic policy settings, with a focus on taxation policy.
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