Below trend growth to continue
Confidence falls despite strong post-Omicron conditions.
Small and medium enterprise (SME) business confidence fell further in Q2, down to +4 index points, in line with confidence levels reported by larger business in the NAB Quarterly Business Survey. Still, SME business conditions rose to +13 index points in Q2, a strong level by historical standards, with trading conditions particularly elevated and profitability and employment both ticking higher.
According to Alan Oster, NAB Group Chief Economist: “SME confidence continued to soften in Q2, back to around the long-run average. As is often the case, confidence is softest among the smallest firms. Confidence in the transport sector took a significant hit, likely reflecting the impact of higher oil prices.”
“The fall in confidence came despite improvement in conditions, with SMEs of all sizes seeing conditions improve in Q2,” said Mr Oster. “SMEs in accommodation, cafes & restaurants saw a dramatic improvement in conditions, surging from a deep negative in the Omicron-affected Q1 to a strong positive level in Q2, and most other sectors were higher.”
Across the states, SME conditions improved everywhere except SA. Confidence fell sharply in Qld and also fell in NSW and Vic, but edged higher in WA and SA.
Leading indicators rose in Q2. Capacity utilisation reached 84.4% (similar to the rate among larger firms in the NAB Quarterly Business Survey), forward orders rose 4pts to +11 index points and capex rose 1pt to +9 index points.
Costs pressures remained elevated. Purchase cost growth (2.4%), labour cost growth (1.4%) and overheads (1.2%) were all higher, with purchase costs running well above previous highs. Output price growth also rose, to 1.6%. Still, the sales margin index improved 4pts, to -8 index points.
According to Mr Oster, “As seen in surveys of larger firms, SMEs continue to face very elevated cost pressures, putting margins under pressure and pushing firms to increase prices. The pressure on margins is likely contributing to softening business confidence as firms consider how to remain profitable in a difficult set of circumstances.”
Labour and materials availability continue to constrain output for SMEs and larger firms alike. Around 80% of firms report availability of labour is a constraint and the share citing availability of materials as a constraint rose to more than 60%, a new record level.
“Despite the headwinds from supply side constraints and energy and oil price increases, it appears SMEs are holding up fairly well for now,” said Mr Oster. “The challenge will be whether this momentum can be maintained over coming months as inflation and interest rates rise higher.”
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 Quarterly SME Business Survey (Q2 2022)
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