Small and Medium Enterprise (SME) business conditions and confidence declined in Q1 2019. Business conditions in the sector declined 5pts to +3 – a below average level. SME confidence edged lower, and is now negative, suggesting that the decline in conditions may persist for some time. Business conditions have now declined for a year since peaking in early 2018, mirroring the developments in larger firms surveyed in the NAB Quarterly Business Survey.

According to Alan Oster, NAB Group Chief Economist: “The Quarterly SME survey suggests that the weakening in business activity through the second half of 2018 has persisted into early 2019. The decline this quarter was largely driven by falls in profitability and trading while employment only edged lower – reflecting the pattern we are seeing in other surveys. For now it looks like labour demand is holding up better than business activity itself”.

“The declines in conditions were broad-based across industries this quarter, with retail and wholesale now weakest, and property not far behind” said Mr Oster.
“Health and business services have held up better, and are still at relatively high levels” said Mr Oster.

According to Mr Oster: “By state, conditions have eased across all states over the past year. Of the mainland states they remain best in Victoria and NSW. Of some concern are SME conditions in WA which have again weakened and are negative suggesting that previous signs of improvement have reversed”.

“SMEs continue to report demand as the most significant constraint on output – as it has been for some time. With the ongoing strength in the labour market, the availability of suitable labour also remains an important factor at present, after drifting higher in recent years” said Mr Oster.

Forward looking indicators were mixed in the quarter with expected business conditions 3 months ahead falling, but expected employment and capex at the same horizon edging higher. Capacity utilisation edged higher but remains lower than a year ago. As with confidence, forward orders – a forward looking measure of demand – turned negative and is below average.

“While business confidence suggests businesses themselves think there will be little improvement in conditions, other forward looking indicators were mixed but overall suggest further moderation. Expected conditions 3 and 12 months ahead declined. Employment and capex ticked up in the quarter, but this optimism may well be short lived if trading conditions continue to weaken. For now capacity utilisation is still high, but has moderated from a year ago” said Mr Oster.

The NAB SME Survey is the leading survey of small and medium businesses in Australia, and complements the comprehensive Quarterly NAB Business Survey (QBS) which covers larger businesses. The SME survey offers a rich repertoire of insights into factors affecting smaller firms’ conditions by state, industry and size, as well as an assessment of their outlook for investment and output.

For more information, please see the NAB Qtly SME Survey report Q1 2019.