How is your sector faring in the downturn? A SmartCompany guide

here at SmartCompany headquarters, we are getting very different reports on how various sectors of the economy are fairing. Things are clearly tough in the financial services and property sector, but our contacts in the advertising and pockets of the IT s

The Reserve Bank’s decision to cut official interest rates by 1% is a clear indication that economic downturn is about to get a lot worse.

But here at SmartCompany headquarters, we are getting very different reports on how various sectors of the economy are fairing. Things are clearly tough in the financial services and property sector, but our contacts in the advertising and pockets of the IT sector are still reasonably bullish.

Let’s have a quick look at how some of Australia’s key sectors are performing. Also, let us know how you are finding conditions in your industry by sending a quick report to us at [email protected].

Advertising and marketing

This is one sector that appears to be holding up reasonably well at this stage, with advertising spending still reasonably strong across most sectors and marketing budgets holding up. One PR executive I spoke to this morning said he is yet to see any drop off in clients’ budgets. “In fact, while we’re keeping everything crossed, we’re actually seeing a lot of new business walking in the door.”

Agribusiness

The drought is still weighing heavily on the agriculture sector and the short-to-medium outlook is mixed as best. While the recent slide in the Australian dollar should lift the sector’s export performance, weaker global economic growth will weigh on soft commodity prices.

In the longer term, the pressure on the world’s food supply should help keep conditions reasonably strong. Chris Vasey, managing director of South Australian company Enviromist Industries, says the US agriculture sector remains robust despite the downturn there.

Construction and engineering

This sector continues to hold up reasonably well thanks to spending on infrastructure and mining projects. In fact, skill shortages remain the sector’s biggest concern. However, the outlook is a bit cloudy. The Association of Consulting Engineers Australia expects revenue will increase by 8% in 2008-09, by 4% in 2009-10 and by just 2% in 2010-11.

Financial services and insurance

The good times are officially over for the financial services sector, as evidenced by the collapse of brokers such as Opes Prime and Chimaera, lenders such as Asset Loans Group and investment bank MFS.

Plummeting investment returns, increased industry competition and skeptical customers will mean the sector remains depressed for some years. Suncorp Metway, Australia’s largest bank/insurer, is currently on the selling block, which indicates the sector is also about to enter a period of consolidation.

Food and beverages

HJ Heinz’s $280 million takeover bid for Golden Circle shows at least one global player is confident about the Australian food sector’s prospects. The falling Australian dollar will help food exporters, although the already sky-high prices of imported raw materials could rise further as the currency slides.

Health and pharmaceuticals

This is one sector that should be relatively unaffected by the downturn, with Australia’s ageing population underpinning growth for many years to come. However, the wellness sub-sectors such as complimentary medicines, beauty treatments, personal fitness and cosmetic surgery are likely to take a hit as discretionary spending slows.

Information technology

The Australian IT sector received a warning yesterday when the chief executive of software giant SAP, Henning Kagermann, revealed its revenue growth in the three months to 30 September was 13%, well down from the 27% growth the company forecast in July. Kagermann said the events of the last month have led to a “very sudden and unexpected” drop in activity.

There is one glimmer of hope for the sector; companies looking to cut costs may invest in technology that allows for workforce reductions. Melbourne-based financial services software company Bravura Solutions reported a 15.6% jump in revenue for the September quarter, and chief Iain Dunstan says the company can weather the downturn. “Our business tends to be counter cyclical – so our revenue opportunities can increase in tougher times. When financial institutions are faced with cost cutting pressures, one way to achieve this reduction in cost is through improvements to technology.”

Leisure and gaming

Falling discretionary spending will hit the leisure sector hard, although gaming sector revenue tends to be reasonably recession proof. The tourism sector is bracing for a tough year. The Government’s Tourism Forecasting Committee said in August that it expects international tourist arrivals will be static in 2008 at 5.6 million because of high oil prices and the strength of the Australian dollar.

The dollar and oil prices have since dropped sharply, but the global slowdown is likely to have clamped travellers’ wallets shut. Domestic travel could increase marginally as Australians chose to stay at home for their holidays.

Manufacturing

The peak manufacturing employers group, the Australian Industry Group, welcomed yesterday’s rate cut, which it hopes will provide some relief to the struggling sector. According to the AIG’s performance of manufacturing index, the sector contracted for the fourth straight month in September. Most worrying was the outlook for new orders, which fell for the fifth consecutive month, indicating the sector could be in for a prolonged period of pain.

The fall in the Australian dollar will be a doubled-edged sword for the sector. While exports will be more competitive, key import costs such as steel and plastics are likely to rise.

Media and internet

Things looked grim for media companies even before the events of the last few weeks, as highlighted by Fairfax Media’s decision to savagely cut costs and jobs. How well media companies perform over the next 12 months will depend entirely on how advertising spending holds up – the longer the downturn lasts, the harder things will get.

The internet sector is also starting to see some early signs of weakness. Online auction giant eBay’s decision to cut its workforce by 10% in the face of weakening sales provides a good bellwether for the global internet sector.

But closer to home, it seems that as always, good companies will still do well. David Trewern from DTDesigns tells SmartCompany today, his company is averaging 55% revenue growth and continues to do well in the slowing climate as companies shift their marketing spend online.

Property

SmartCompany’s regular reports on the collapse of property projects and developers tells you all you need to know about this sector – it’s sick. The interest rate cut should help stabalise the property sector, but don’t expect growth to accelerate. As Australian Property Monitors economist Liam O’Hara explains today, there is simply too much debt around for a quick recovery to take place.

Resources and energy

Despite recent falls in commodity prices, the resources sector is likely to remain the strongest industry in the short to medium term. However, slowing global economic growth will hurt the sector’s prospects and the fall in the Australian dollar, while good for exports, will make infrastructure and equipment costs more expensive.

Retail

Another very mixed sector. Late last week Harvey Norman announced it was slashing its marketing budget by 20% in the wake of slowing sales. But yesterday, rival JB H-Fi announced strong third quarter sales.

But JB Hi-Fi executives would know that it’s only a matter of time before every retailer feels the pain from the downturn, and while the Australian Retailers Association welcomed yesterday’s rate cut, it is still looking like an ugly Christmas. The falling dollar could present a big problem for retailers, as prices of imported goods – such as electronics – are set to jump.

Telecommunications

Growth should remain fairly steady in this sector, although competition will increase at the smaller end of the industry. A steady stream of small players have set up telecommunications businesses in recent years, exploiting niches that Telstra and Optus do not dominate. The slowdown and credit crunch could hurt these little guys, leading to increased consolidation.

Transport and logistics

The slowing economy will hurt the highly-competitive transport sector, and is likely to put a few smaller players (particularly owner/drivers) out of business. The one bright spot is that fuel prices are likely to fall, which should give players in this sector a bit of relief.

 

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