Company directors worried about RBA rate rises, mortgage crisis, outlook for business conditions

Deteriorating business conditions, a potential mortgage crisis and cyber security are the big concerns keeping company directors awake at night, according to a new report.

Company directors are concerned about deteriorating business conditions in Australia, including fears of a mortgage crisis if the Reserve Bank raises rates again, according to a new report for the Australian Institute of Company Directors.

The report says directors have become increasingly concerned that the Reserve Bank’s tightening monetary policy was having a negative effect on business, and 72 per cent of respondents worried that further rate rises would cause a mortgage crisis.

While director sentiment has improved over the past six months thanks to an improving global economic outlook, including China’s reopening, the report shows that there has been a sharp drop in their mindset about the Australian economy.

AICD chief economist Mark Thirlwell said company directors were increasingly concerned by the effect of rising interest rates on the Australian economy.

“More than half have told us that higher rates are now impacting on their business,” he said.

This is more than three times higher than those who were concerned about it a year ago.

“While more approve of the (RBA’s) anti-inflationary measures than disapprove, they are also concerned about the recession risk, threats to the housing market and the rate of business insolvencies,” Mr Thirlwell said.

The report shows overall director sentiment in Australia is still below zero, but has risen from negative 8.5 in the second half of last year to negative 6.1 in the first half of this year, as a result of the improving economic outlook offshore.

The biggest positive force was the big increase in the assessment of the outlook for the Chinese economy – up by 43 points on the previous survey from minus 11 to 32 – and rising optimism about the outlook for economies in the US and Europe.

The survey’s results come amid news this week that the Chinese economy has reported a stronger-than-expected 4.5 per cent year-on-year growth in the March quarter.

Directors’ optimism about the Australian economy has dropped by 10 points to 36 in the first half of 2023.

AICD managing director Mark Rigotti. Picture: Hollie Adams

Their assessment of Australia’s future economic health has also fallen, from 19 points to 7 – sharply lower than the recent high of 65 points in the second half of 2021.

National business conditions fell by 16 points from 40 to 24, while conditions in states and territories fell from 18 to 11 points.

Directors reported that the outlook for their own sector fell from 32 points to 20, and their expectations about future conditions was down from 30 points to 21.

Directors in Western Australia were the most bullish about their state’s business prospects, with 69 per cent expecting strong conditions over the coming year.

Mr Thirlwell said the report showed that directors believed that labour shortages were a continued constraint on business. Of those surveyed, 83 per cent said skilled migration levels had failed to keep pace with demand, despite the significant increase in migration numbers in recent months.

AICD managing director Mark Rigotti said it was clear that businesses were conscious of the “challenging economic environment” and were “looking at ways of dealing with a protracted period of volatility”.

He said there were very different views of the outlook from directors in different sectors; some were more concerned about the economic outlook while others were more bullish.

“Directors are starting to experience the impact of higher interest rates, higher inflation and higher energy costs,” he said.

Mr Rigotti said directors’ outlook had changed from being more upbeat about Australia and concerned about the world outlook in the past, to the current situation whereby they were increasingly concerned about the local outlook and more optimistic about developments offshore.

“The Chinese economy has recovered a lot faster than many people had predicted,” he said.

“Six months ago, the outlook for China was all doom and gloom.”

But the biggest single worry for directors at the moment was cyber security.

“If you ask directors what is the big issue that keeps them awake at night, cyber security is through the roof. It is the number one on the worry list for directors,” Mr Rigotti said.

The report showed that 50 per cent of directors saw this as their main concern, up from 37 per cent in the same survey six months ago.

He said directors were watching developments in government policies around cyber security and they hoped the government would adopt constructive policies on cyber security.

Mr Rigotti said there needed to be a balance struck between putting pressure on directors to take their responsibilities about cyber security seriously while not putting all the focus on blaming the victim.

He said concerns about the skill shortages had eased a little because of the recent increase in migration levels, but directors were becoming increasingly concerned about levels of new regulations being imposed.

“People are worried about industrial relations reform,” he said. “Regulation is adding to the cost of doing business and driving up prices, which is adding to inflation.

“There is a danger of getting into a spiral if governments keep adding to the level of regulations.

“Every dollar spent on regulation takes away from money being spent on the business.

“It can have a cumulative effect which is really challenging.”