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CEOs in Australia and around the world are feeling more optimistic than ever before, according to PwC’s 24th CEO Survey. And while local CEOs cite over-regulation, tax issues and trade conflicts as threats to economic growth, they may be underestimating the potential impact of supply chain volatility and slower population growth.
Although Australia’s CEOs believe their organisations are in greener pastures this year, there could be some glass hidden in the grass.
Seventy per cent of Australia’s CEOs say they expect global economic growth to improve in 2021. Eighty-five per cent anticipate an increase in profitability, and 88% expect an increase in revenue growth. Looking longer term, 92% of Australia’s CEOs express confidence for the next three-year period (and 88% of global CEOs agree).
Corporate leaders’ sentiments echo those of the Reserve Bank of Australia1 (RBA), which expects GDP and employment to reach their pre-pandemic levels during 2021 (sooner than was projected at the height of the initial COVID-19 lockdown).
This confidence is a significant jump from last year’s CEO Survey, where only 11% of Australia’s CEOs were anticipating an improvement for 2020. However, the rebound is unsurprising considering the international recognition Australia has received for its handling of COVID-19 and an underlying sentiment that the economic impact will unlikely worsen.
There has been a surge in Australia’s CEOs looking to mergers and acquisitions (M&A) as a path to growth (63% in 2021, up from 34% last year). The drivers for this are many and varied. As government support ends for many distressed companies, corporate leaders will be eyeing potential acquisitions. Others may seek to pivot the nature of their businesses, buy in related markets, or purchase complementary businesses that add to their technology or logistics capability.
The majority of Australia’s CEOs (84%) also point to organic growth as a driver of organisational progress in 2021. Given the prevailing economic climate, this may involve business process innovation rather than radical technology innovation.
1 Statement on Monetary Policy’, Reserve Bank of Australia, accessed February 2021, https://www.rba.gov.au/publications/smp/2021/feb/economic-outlook.html
When asked about threats to revenue growth, most of Australia’s CEOs (84%) pointed to over-regulation making it the second-greatest threat behind cyber (95%). Local CEOs’ concerns over availability of key skills has slightly dropped (68% in 2021, down from 78% in 2020), which is likely a result of more than half (53%) of Australia’s CEOs factoring this into their strategic risk management activities. Workplace reform will be essential in 2021 and beyond, to enable corporates to raise productivity (e.g. through upskilling the workforce and digitising operating models).
Taxation is also keeping Australia’s CEOs awake at night. In the past year, concerns have shot up over tax policy uncertainty (58% in 2021 versus 35% in 2020) and increasing tax obligations (47% vs 39%), but CEOs are looking to the Government for the solution. Fifty-eight per cent of Australia’s CEOs (up from 16%) say an effective tax system is a priority for government to help deliver.
Australia’s CEOs increasingly fear the impact of trade conflicts (72% in 2021 vs 66% in 2020), and understandably so. One in five Australian jobs are connected to international trade, yet the nation’s economy is largely reliant upon one trade partner (46% of Australia’s goods exports are now going to China) with whom tensions may worsen before they get better. Australia has also slipped from 6th to 9th as a top market for growth for global CEOs. Investment - both foreign and domestic - is a critical component to the post-COVID-19 recovery, and Australia should position itself as a key investment destination.
But as one door closes, another may open. Trade diversions from China will recalibrate markets elsewhere and 34% of Australia’s CEOs say entering a new market will be a driver for growth (a 9% increase from 2020). With the Federal Government accelerating free trade agreements with India, the EU and the UK, new opportunities for diversification will emerge. However, doubts remain about whether Australian businesses are ready to capitalise.
For example, at a time when the cost of trade is shooting upwards, less than a third of Australia’s CEOs say they are focusing on supply chain and logistics. Embedding resilience by digitising supply chains will achieve durability and continuity of supply, while creating a platform for innovation, cost savings and increased revenue. Government is paving the way for businesses to embrace this, by exploring and investing in the digitisation of the regulatory frameworks of supply chains.
With trade uncertainty set to continue, there is no time to lose. Australia’s companies must build more agile and adaptable supply chains, while developing contingency plans and relationships in new markets. Now is the time to be proactive and explore what can be done differently to protect against ongoing disruptions.
One of the foundations of Australia’s growth in recent decades has been population expansion. A steady flow of immigration has injected fresh talent, diversity and skills into the nation’s workforce, while increasing local market demand for goods and services.
But the Government’s pandemic response has stopped immigration in its tracks. Australian economy forecasts suggest the country’s population in 2030 will be significantly smaller (1.1 million fewer people) than it would otherwise have been.
PwC’s 24th CEO Survey suggests many of Australia’s corporate leaders could be underestimating the impact of slow population growth. Any organisation that consciously or unconsciously relied upon the assumption of continued population growth may need to refresh its strategic plan.
Now is the time for CEOs to seize the initiative and prepare the ground for economic growth. It’s encouraging that many have signalled their intent to pursue M&A but business leaders must be bold in other ways too. With low interest rates and government incentives on the table, CEOs must back up their confidence with investment to cultivate growth.
Invest in capital and innovation to ride the post-pandemic growth wave
Take advantage of historically low interest rates and a relatively high Australian dollar to consider offshore investments in supply chains
Use the challenge of trade tensions to explore new markets with partners and consumers
Work with governments to assist in shaping their post-pandemic growth agenda.
Chief Economist & Partner, PwC Australia
Tel: +61 (2) 8266 4611
Partner, PwC Australia
Tel: +61 (3) 8603 2067