Below trend growth to continue
SMEs see conditions weaken in Q2 as economy slows
SME business conditions fell sharply in Q2, to just +1 index point, leaving conditions for SMEs well below their long-run average. Employment and profitability were particularly weak, especially among the smallest firms in the survey, and there were large falls in the hospitality sector and in health, both of which had previously reported very elevated SME conditions. Overall, the fall was more severe than that seen among larger firms in the Quarterly Business Survey, where conditions have softened but remained above average in Q1. Forward-looking indicators also deteriorated for SMEs, with both confidence and forward orders falling well into negative territory. In addition, almost three-quarters of SMEs continue to report significant difficulty finding suitable labour and cost pressures remain elevated with purchase costs growth and labour costs growth only easing slightly from Q1. The moderation in price growth was also limited, at 1.2% in quarterly terms down from 1.4% in Q1.
SME business conditions fell 11pts to +1 index point, below the long-run average of +6. Fell significantly across all SME size categories, with the index weakest for the smallest firms at -4 index points. Trading conditions, profitability and employment all fell by large amounts.
“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.
“As is often the case, conditions have turned particularly weak for the smallest SMEs,” said Mr Oster. “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.”
SME business confidence fell 1pt, down to -7 index points. Forward orders fell 5pts to -4 index points while capacity utilisation was also lower at 82.1%. Capex also fell, down 3pts to +3 index points.
“Confidence has been negative for SMEs for a number of quarters now, similar to what we are seeing among larger firms,” said Mr Oster. “Importantly, forward orders for SMEs have also fallen into negative territory which is a sign that things may deteriorate further.”
Cost pressures eased slightly, with purchase cost growth of 1.8% in quarterly terms (down from 2% in Q1) and labour costs growth of 1.5% (down from 1.6%). Final prices grew at 1.2% overall (down from 1.4%) and the sales margin index deteriorated to -14 index points (from -9 in Q1).
“As we have seen across our surveys, cost pressures remained elevated for SMEs in Q2 with only gradual moderation,” said Mr Oster. “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.”
For more information, please see the NAB Quarterly SME Business Survey (Q2 2023)
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