Employment, profitability particularly weak in Q2
In the second quarter of this year, business conditions for small and medium-sized enterprises (SMEs) experienced a sharp decline, dropping to just +1 index point, which is well below their long-run average, according to National Australia Bank's quarterly SME Survey.
The survey found that employment and profitability were particularly weak, with the smallest firms being the most affected. The hospitality sector and the health sector, both of which had previously reported strong SME conditions, experienced significant falls.
The overall fall in SME conditions was more severe than that seen among larger firms in the Quarterly Business Survey, although conditions for the latter remained above average in Q1.
Forward-looking indicators for SMEs also deteriorated, with both confidence and forward orders falling into negative territory, according to the survey. Additionally, close to three-quarters of SMEs reported significant difficulties in finding suitable labour, and cost pressures remained high, with only slight easing in purchase costs growth and labour costs growth compared to Q1. The moderation in price growth was limited as well, declining from 1.4% in Q1 to 1.2% in quarterly terms.
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The decline in SME business conditions was widespread across all size categories, with the index being weakest for the smallest firms at -4 index points. Trading conditions, profitability, and employment all experienced significant decreases, according to the survey.
“Business conditions clearly deteriorated in Q2, and while conditions for larger businesses are still okay, today’s SME survey confirms smaller firms have started to really feel the impact,” said NAB chief economist Alan Oster (pictured above). “As is often the case, conditions have turned particularly weak for the smallest SMEs. There have been big falls for SMEs in hospitality and in the health sector, which were quite strong to start the year but are now quite weak, and SMEs in property and the retail sector are also in negative territory.”
While cost pressures slightly eased in Q2, with moderate growth in purchase costs and labour costs, SMEs continued to face challenges. The sales margin index deteriorated, indicating increasing pressure on SMEs' margins in the future.
“As we have seen across our surveys, cost pressures remained elevated for SMEs in Q2 with only gradual moderation,” Oster said. “SMEs also reported only gradual easing in price growth. With cost pressures high and conditions deteriorating, we expect SMEs’ margins will be under increasing pressure over the period ahead.”
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