It’s no secret that the Australian economy has done quite well over the last two decades. In a world that was plagued by several recessions since the early 1990’s, Australia has fared remarkably well; seeing steady increases in GDP, per capita income, and drops in the unemployment rate.
However, as history has taught us over and over, no country can sustain permanent economic growth. Eventually, Australia’s record run must come to an end. Shrewd company management and financial teams must be forward-looking; planning their activities well ahead of the next quarter to account for a number of possibilities.
As Australia enters its third decade of growth, some troubling indicators begin to appear. Slower GDP growth and stagnation in per capita income growth may be the first signals of looming economic issues. If Australia does indeed enter a period of economic turbulence, several attractive opportunities may become available to forward looking organisations. These opportunities may include:
Alternative Financing Practices
Organisations that sell directly to the end consumer may wish to begin exploring direct financing opportunities. In the event of poor or negative economic growth, banks are likely to begin cutting loans for items like home appliances, cars and other big ticket items. Manufacturers and distributors of such products may wish to start planning ahead for such a scenario through in-house lending strategies. Being able to offer direct financing to quality consumers may be a strong competitive edge in bad economic times.
Mergers
Turbulent economic times may present an opportunity for some companies to establish a larger presence in an industry. For example, during bad economic times, smaller companies tend to become cash-strapped relatively quickly. Being able to wield large cash reserves for purposes of buying out competitors can be a very powerful long term strategy.
Growing in the bad times
There is always a glimmer of positive in anything that’s negative. Turbulent economic times are no different. One viable strategy can be to build up cash reserves to comfortably offer discounts to customers. Organisations with high debt and low cash reserves cannot do this and thus must proactively act to improve their cash position. An operator with a strong balance sheet can weather economic turmoil, retain their customer base, and even seize market share in the process – all of which will allow for a stronger rebound once the economy picks up.
Looking forward
The possibility of persistent, strong economic growth is not highly likely. With nearly 20% of Gross Domestic Product depending on exports, the growth of the Australian economy is heavily dependent on economies of other major countries. Consumer confidence is likely to remain fragile and businesses must ensure that their practices are in line with consumer sentiment.
In this case, there are opportunities for Australian organisations in cost-cutting. Instead of capturing growing market share and attempting to gain more of the average consumer’s spending, companies will now need to cater to consumers who are becoming more wary of high costs. Without rises in salaries and per capita income, this will be absolutely essential for any company that will want to maintain its competitive edge.
Cost cutting is a dual process that on the one hand can include increased efficiencies in production, and on the other hand, lower costs of capital by optimizing capital structures through borrowing and equity buybacks. It must be measured, calculated and ultimately strategic so as to not significantly result in a deterioration of an organisations capabilities or competitive advantage.