Trying to plan for your business over the next year or two is likely to be challenging.

A report from AI Group claims that businesses should expect to face higher-than-usual inflation and interest rates, together with lower-than-usual growth, for at least the next financial year.

The industry association warns that the outlook for the next two years is particularly poor with business investment, housing investment and export growth expected to fall.

A big drag on the Australian economy is inflation which has been stubbornly difficult to rein in despite 13 interest rate rises.

AI Group notes that if inflation can’t be tamed, Australian businesses can expect delays in interest rate cuts and in the improvement in the real incomes needed to stimulate spending again.

High inflation has already reduced real incomes and spending power, resulting in weak growth in household consumption. It has also meant that savings buffers built up during COVID-19 are being exhausted.

Economic growth falters

According to the Australian Bureau of Statistics (ABS), economic growth slowed over the 2023/24 financial year. Gross domestic product per capita was down for the sixth consecutive quarter and fell 0.4% in the June quarter.

Michelle Marquardt, ABS head of prices statistics, says: “Excluding the COVID-19 pandemic period, annual financial year economic growth was the lowest since 1991/92 – the year that included the gradual recovery from the 1991 recession.”

The Australia Institute says household discretionary spending slumped 0.2% in the June quarter, the weakest growth rate since the COVID-19 lockdowns in the September quarter of 2021.

However, non-discretionary spending on items such as food, health and transport remains positive but is also slowing rapidly.

This has affected those businesses exposed to the consumer economy. The retail industry – groceries excluded – has been in recession for the past financial year. In addition, businesses in mining, manufacturing, construction, wholesale trade and administrative services have been hurt by surging materials and wage costs and are either in contraction or close to it.

That said, government-connected sectors such as healthcare are performing well above the national average thanks to rising spending by federal and state governments.

Inflation remains stubborn

Inflation remains well over the Reserve Bank of Australia’s target range of 2–3%. Treasury says it will take another year to return to this level. The RBA says it could take two years to get there.

Be what may, AI Group says SMEs should expect interest rates to take longer than expected to fall. This could extend the period of borrowing cost pressures and the cost-of-living impacts on households.

AI Group says official forecasts are that growth will bottom out in the middle of 2024, before recovering to just under 2% in 2024/25 and then just over 2% in 2025/26.

Labour challenges ahead

However, AI Group notes that the labour market has yet to weaken despite deteriorating business conditions.

“Record-low unemployment levels have shown very little easing over the last 18 months and remain well below normal. This combination of a slowing economy with high inflation and a tight labour market will prove challenging for employers to manage over the coming year.”

AI Group says skills shortages and hiring difficulties continue, especially for professional and trades roles. At the same time, wage growth has accelerated to its fastest rate in two decades, boosted by recent large increases to award and minimum wages.

“The outlook is for wage growth to remain elevated for the next two years,” says AI Group.

“Employers in all industries should expect to contend with above-normal wage increases during a period when we will face below-normal economic growth and industry performance.”

What you can do to insulate your business

With the short-term business outlook looking so uncertain, company owners should carefully scrutinise their cash flow and keep it in check.

They can do this by cash flow forecasting, reining in costs, getting rid of excess inventory and ensuring customers pay on time. It may pay them to focus on their best sources of revenue and on providing great customer experiences.

Using the latest technology tools and apps may help cut costs and save time. Interestingly, Xero’s research indicates that digital adoption improves the resilience of small businesses in times of economic uncertainty.

Businesses could also turn to their accountants, industry bodies, local business associations, banks, non-bank lenders and brokers for advice. And they could also look at what support and benefits are available from the government.

Financial facilities to help your business

Planning for the next two years is set to be challenging as businesses navigate their way through higher inflation, interest rates and wages combined with sluggish consumer spending and lower-than-usual economic growth. But there are several funding options that are designed to help businesses flourish despite challenging conditions, helping you maintain your business’s financial health while also enabling you to capitalise on important growth opportunities.

Grow your business with ScotPac

ScotPac has been helping Australian businesses survive and thrive with fast and flexible finance solutions for decades. Our commercial funding options include:

All our facilities are designed with the needs of Australian business owners top of mind. Plus, they’re all completely customisable, so you can benefit from a tailored funding solution that suits your business’s needs.

To find out more about our Invoice Finance, Trade Finance, Asset Finance or Business Loan solutions or to discuss your goals for your business, get in touch with ScotPac’s lending specialists today.