Rising cost pressures that have stayed elevated in the last few months are weighing on the optimism of businesses and their profit outlook in the near term.

The overall index of the RAM-CTOS Business Confidence Index (BCI) for 3Q 2022 receded to 51.4 from a record high of 65.0 in the preceding quarter. Over 80% of the 152 firms polled in this survey cited increasing costs as the top challenge dimming their sentiments. Nonetheless, surveyed firms remained optimistic about the outlook for sales amid the strong demand recovery.

Rising cost of business denting optimism

While rising costs have been cited as a top hurdle in our surveys for three consecutive quarters, it had not dented firms’ sentiments until now. These costs, initially thought to be transitory, are unlikely to abate anytime soon, putting businesses under higher pressure. For the same reason, the share of firms citing labour constraints as a significant challenge stayed high at 53% amid persistent manpower shortage.

These challenges are affecting firms’ operations and profitability, even as the volume of incoming orders remains healthy as indicated by the positive sub-index reading of nearly 56 for revenue outlook. Contrast this to the profitability sub-index of just 46, denoting poor prospects for future profits. The margin pressure is particularly pronounced among smaller firms surveyed that voiced broadly weaker sentiments.

Not all firms have raised prices to counter rising costs

To sustain their business, close to 60% of surveyed firms have raised prices while around 35% kept prices unchanged. Notably, around 80% of micro enterprises had not raised prices, a prominently larger share relative to the overall survey sample. The main reason cited was the fear of losing customers, while some opt to accept lower profit margins.

Looking ahead to the next six months, some firms may need to increase prices further if they are to remain viable.

Strong demand recovery but weaker bottom line

Given robust economic recovery, businesses in general are still optimistic about sales growth as the economy reopens. However, persistent spiralling costs and the challenges in hiring workers are taking a toll on firms’ bottom lines and for the micro and SMEs, their viability in the medium to long term. As such, policymakers are urged to continue providing support, reducing ‘red-tape’ as well as facilitating and offering guidance on accessing various market initiatives and support available to vulnerable micro enterprises and SMEs. The support afforded will allow these firms to capitalise on strong incoming orders and ensure that the nation’s economic recovery remains on a sustainable path.

Source: CTOS news