Private business confident despite rising interest rates, but skills shortage looms

Private businesses are optimistic about their future, expecting solid results for revenue and profits during 2010 despite continuous interest rate rises, the latest results from the KPMG Mood of the Market survey reveals.

But businesses owners are also increasingly worried about the uncertainty in the market, with unpredictable global disasters such as the recent volcanic eruption in Iceland making entrepreneurs nervous. Many also admit they are facing skills shortages.

The survey reveals the key goal of 50% of the respondents for the remainder of the financial year is sustaining business growth, with 62% expecting to meet revenue targets for the 2009-10 financial year.

This comes as 57% of businesses surveyed expect interest rates to rise another 0.5% within the next six months, indicating many are unmoved by the threat of a rising cash rate.

KPMG partner Graeme Matthews says the fact businesses expect growth despite rising interest rates reveals they are preparing for the worst and are hedging their vulnerability to the rising cash rate.

“Over half of these businesses peg growth as their major objective, and there is certainly an air of optimism out there. This is a clear indication that our respondents expect the sluggish economy will abate to better times.”

“I think a lot of these businesses have been conditioned to the fact that interest rates will increase. And while interest rates can cause sentiment to erode quickly, I think we are still at very low rates historically and businesses realise that even though we are moving to more normal levels.”

But while businesses are optimistic about the future, the survey reveals they are also afraid of a skills shortage. Matthews says 46% of businesses maintained their headcount during the past six months, and are now worried about attracting staff, with 43% claiming they are suffering a skills shortage already.

“That 43% figure is up from 25% during the survey we took in August. It’s going to be interesting to see what effect that will have on wages, because there is demand for pay increases from employees who may have suffered a freeze during the downturn. They expect to be caught-up to speed.”

Matthews also says 36% of respondents expect operating expenses, excluding wages, to be the most significant driver of inflation over the next six months.

But in another sign businesses are having trouble accessing funding, 39% of respondents said they experienced difficulty obtaining finance during the past six months. Matthews says this indicates that the market is still tight, and banks aren’t yet ready to begin increasing their lending practices.

“I think one of the issues arising from the crisis is that there is a real credit squeeze. There is no funding around, and really the pricing of that funding has been a problem as well. While the availability of funding is becoming more relaxed, I think perhaps as interest rates rise the pricing of that funding will also rise as well.”

Matthews warns the ultimate challenge for businesses at the moment is uncertainty. He argues private companies can withstand interest rate rises and financial downturns, but that many are unprepared for dealing with unforeseen scenarios.

“There is still uncertainty in the future. Look at volcanos, tsunamis and fraud charges against Goldman Sachs – you have things coming out of leftfield and that can spook a lot of businesses which don’t know how to act.”

“The message from this survey is that you need to be nimble and change. One of the biggest things to watch is that during an upturn you think you’re going to go back to profitability quite quickly, but there will be pressures on payroll costs, increasing overheads and margins can be eroded. It can get away from businesses quickly, and they need to watch that.”