Understanding the Economy and Supply Chain Impacts in the Skillsoop Market Report

SKILLSOOP’s network is showing a constant increase in available resources for both procurement and supply chain, with the % of non-employed professionals at 71% of the total sum of active professionals. Competition for jobs is therefore at an all-time high.

There are multiple reasons for this surge in candidate availability depending on the sector and scale of business operations. For instance, many project-based procurement professionals are at the mercy of an illiquid construction sector. In utilities, it is poor ROCE. In the large-scale private sector, it is a mix of both over-capitalisation and poor investment strategies that have damaged fiscal performance. Back in March 2024, SKILLSOOP indicated the major challenge for businesses in such conditions is managing costs and supply base while front-end revenue is contracting. How do you invest in the future when your employees are processing the fear of job losses and the board is anticipating lost revenues? To recapitalise is expensive, while retained cashflows are chewed up quickly.

The question is, how will opportunities fare in procurement and supply chain over the next six months—is the outcome at all predictable? If we look at the current commodity complex: energy, which is dominated by crude oil and natural gas, has seen a recent decline from yearly highs. Still, it remains subject to short-term fluctuations. This instability presents a mixture of risks and opportunities for Australian corporate supply chains. Cheaper energy is good for GDP growth and consumer sentiment, especially as Australia is heavily reliant on global price movements. Lower prices could offer some cost relief to the transport sectors and overall distribution across road, rail, and sea, where fuel is circa 30% of cost input. For manufacturing, gas is feedstock for industrial processes, and lower pricing could also offer some cost relief. However, coking coal is rising, adding to COGS across industrial sectors.

So, businesses across Australia are going to continue to face price volatility, exchange rate fluctuations, and ever-increasing supplier dependence, as further vendor rationalisation is used as a lever to manage inflation. To counter, supply chains will need to think strategically about sourcing, hedging, diversification (by country), and ensuring contract design is reconciled correctly to scope. Risk for supply chains must also include exchange rate management as global commodities are priced in USD. As the Australian dollar (AUD) strengthens or weakens against the USD, the cost of imported commodities changes, adding another layer of risk that can negate or amplify the effects of price changes.

The good news is wheat, rice, sugar, and dairy have seen significant price drops, enabling businesses in the sector to reduce COGS and increase margins. However, there is typically a delay on consumer relief, meaning immediate impacts will not likely be felt. On the flip side, seed oils, coffee, and vegetable oils are on the increase, which heavily impacts the supporting economy of city commuters, being a key cost input for cafes and bakeries. This ensures our morning coffee will continue to rise. For businesses in the FMCG and retail sector, like the industrial actions highlighted, focusing on cost management via hedging is essential in such conditions—coupled with cementing more strategic alliances with key COGS vendors and seeking ingredient alternatives to avoid drastic changes to consumer experience.

So, the commodity complex highlights a mixed bag of opportunity and risk, and businesses can only do so much to control the outcomes. This is why SKILLSOOP is witnessing a leaning towards cost-out strategies businesses can control—namely a large reduction in headcount that supports back-end operations, a key tailwind for increasing unemployment in the private sector.

The macro data suggest a tight job market, with unemployment at 4.2%, indicating few people are seeking work. These figures add inflationary pressure to wages, as can be seen in the data. Wages and overall labour costs are trending upwards, which in turn adds cost to finished goods and services. Wage growth is at 3.4%, which by official indicators would suggest income is outpacing inflation—yet the reality is anything but. With this wage inflation, there is little in the way of increased productivity, which remains flat. This in turn impacts profit margins to the downside and is a key reason offshoring and outsourcing are back on the agenda for large-scale operations, with tight regulatory policy making AI advancements limited in the near term.

With inflation falling, at least officially, consumer spending based on sentiment alone could increase. The Producer Prices Change is 3.4%, which is lower than the previous period but still positive. This indicates that businesses are facing rising costs for their inputs, but the rate of increase is slowing. When producer prices rise faster than consumer prices—a common scenario during disinflation—corporate profit margins can be squeezed. Businesses may find it difficult to fully pass on their higher costs to consumers, who are becoming more price-sensitive due to the overall economic climate. Import Prices (-0.8% MoM) is a positive sign for retailers and manufacturers who rely on imported goods and components. This may alleviate some cost pressures on businesses, potentially leading to increased profit margins or enabling them to offer more competitive prices to consumers. This dynamic is a key consideration for companies with international supply chains.

Australia's monetary policy is in a state of easing, with the Reserve Bank of Australia (RBA) cutting interest rates from a high of 3.85% to 3.6%. This is a deliberate action to stimulate economic activity after a period of high inflation. The central bank's actions are also reflected in the Interbank Rate, which closely tracks the official interest rate. This easing policy is aimed at making borrowing cheaper for businesses and consumers. I personally believe the RBA has made an error here, as lower interest rates are not the answer and will have little true impact on asset servicing. They will, however, likely drive further inflation when combined with immigration. Many businesses over the 50-year bond bull market have become so conditioned to leverage to hide operational flaws that they are reliant on it for capital injections to fund poorly managed operations. At 3.6% on the short end of the debt curve, WACC is high, placing many capital-intensive businesses’ balance sheets at risk—especially in the construction sector.

For consumers, whose finances are already at rock bottom, looming tax hikes from the Labor government will ensure a slow, if not non-existent, turnaround in sentiment—potentially indicating a continued erosion of margins and revenues for elastic sectors.

The data on Money Supply M0, M1, and M3 shows significant fluctuations, which indicates a degree of volatility in the broader financial system. While the RBA's balance sheet has grown, indicating a return to open market operations, the money supply itself is not growing, as the banking system is not expanding credit at the same rate. This can create uncertainty for businesses, as it may signal underlying shifts in banking and credit conditions that could affect the availability and cost of capital, independent of the RBA's official rate.

As SKILLSOOP always highlights, the Australian economy is no longer in a vacuum—something that offered it some protection in 2008. As time has moved on, we are more at risk from other economies under stress. The UK and Japan are very near the end of their economic cycles, with the IMF possibly needing to repeat a 1976 bailout. If we take Japan, a key trade partner for Australia, the signs are flashing red. The 10-year bond yield has risen by 0.739% over the past year, while short-term yields (1M, 3M, 6M) have risen much less. This indicates that investors are demanding a higher return to lock up their money for longer periods. If we look at the 30-year bond, it is the highest in history, proving central banks cannot truly control the yield curve and placing the Japanese economy at significant risk. This is a problem as Japan is a major pillar of the global banking system and investments. For Australia, a significant increase in Japanese long-term yields can affect the global bond market and currency valuations, including the Australian dollar. If the Japanese yen strengthens as a result of rising yields, it could make Australian exports to Japan more expensive and decrease demand.

The Australian government continues to spend big, as the surplus contracts from 0.9% GDP to 0.6% GDP. Government debt to GDP is now at a record 43.8%, indicating a significant reliance on long-term debt—not a good outcome when productivity and innovation are not improving. The macro data also suggest government revenues are increasing; however, this is likely a conversion of long-term leverage being converted into taxed government wages. With the additional government revenues to be collected from capital gains (super funds) and, if Labor gets its way, your unused bedrooms, the economic panic is clear to see. We have a government that would rather tax and borrow the country into economic poverty than invest in innovation and productivity, which can only be achieved via less government interference in the private sector and a balanced energy policy. The data suggests that the Australian government is running a slightly looser fiscal policy. While it is managing to maintain a budget surplus for now, the rise in government debt and spending indicates this may be difficult to sustain without future adjustments.

In truth, the public sector has outcompeted the private sector for growth and resources, ensuring the Australian economy is in a doom loop that it cannot pull out of. Increased government workers are inflationary, offering a circular pattern of tax revenues and debt to be taxed or borrowed, paid out, and re-taxed, while the remaining cashflows go into supporting rent and mortgages for many—resulting in nothing being produced. High government employment and record levels of immigration are good for vote retention but are rapidly stifling the Australian economy. An economy that, if it were a procurement department, would be labelled Greenfield.