2013 Economic outlook for SMEs

SME confidence is expected to increase as financial markets show some improvement and consumers continue to spend strongly in certain sectors. While the dollar is expected to remain high, the cash rate could fall as low as 2.25 percent this year, reveals NAB’s Head of Australian Economics.

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Going into 2013, caution is still the by-word for many Australian owners of small and medium sized businesses (SMEs). “They’re still very conservative in their gearing and, like consumers, are putting a lot into bank deposits,” says Rob Brooker, NAB Head of Australian Economics.

Anxiety fuelled initially by the Global Financial Crisis (GFC) has been exacerbated for some time by uncertainty about Europe and, more recently, the US fiscal cliff. However, with global financial markets looking better than they have for some time, confidence could increase throughout the year.

For SMEs this could be tempered by consumer caution – though Dean Pearson, Head of Industry Analysis at NAB, warns against the assumption that consumers aren’t spending. “We’re seeing more discrimination than in an upturn but they’re still spending strongly in some sectors,” he says. “For instance, they’re buying cars, going on holiday and visiting cafés and restaurants, and we’d expect this to continue.”

An elevated dollar

Australia’s multi-speed economy is still being affected by the high exchange rate. Although the mining sector has come off the boil lately as commodity prices receded, the Aussie dollar has stayed high, keeping the squeeze on non-mining exports like tourism and manufacturing. Governments are also cutting back and, overall, there are signs of increasing job insecurity.

“We’ve seen a lot of jobs lost in manufacturing and hardly any growth at all in retailing,” says Brooker. “Wholesaling and construction are also generally weak and tourism is still struggling with the high dollar, so there’ll still be a fair amount of pressure on the economy for the next six months or so. This is likely to be felt more acutely by smaller businesses because, in general, they have fewer opportunities to diversify. Small businesses in the weaker sectors are likely to be particularly exposed.”

This may be offset by further interest rate cuts – NAB is anticipating that the cash rate will fall as low as 2.25 percent by the end of the year. “As the mining sector starts to shift from its construction cycle to supplying exports, employment growth may be tougher and there’s an incentive for the Reserve Bank to cut rates in order to get consumers spending again,” adds Pearson.

Different opportunities

The mining boom, the high dollar and recovery from the GFC have all conspired to distort the economy and trigger significant structural adjustment. For example, around 250,000 jobs were created in health, childcare and aged care over the past four years while around 150,000 were lost in manufacturing over the same period.

“It’s more important than ever to understand your customers, to see where they’re spending and to search out opportunities to meet that demand,” says Pearson. “For instance, the number of tourists coming to Australia is up by about three percent but Chinese arrivals are up by 17 percent.”

As the recent Government White Paper pointed out, Asia will continue to present wide-ranging opportunities for those willing make the effort to understand the market and to remain agile and open-minded.

For more economic analysis read the latest NAB Quarterly Business Survey – December 2012