Overview

SME business conditions continued to ease in Q4, though conditions held steady for the smallest firms with medium and larger tier businesses seeing a softening in conditions. Still, conditions for SMEs remained above their long-run average with trading conditions and reported cash flow at very high levels.  SME confidence fell into negative territory, consistent with the fall in confidence among larger firms observed in the Quarterly Business Survey. Forward orders declined and capacity utilisation also softened after record highs reported in the middle of the year. Cost pressures and price growth remain elevated, though the rate of growth in both costs and prices eased from Q3. Overall, the survey suggests that growth is slowing but still healthy across the sector – but SMEs are increasingly wary of how long this persists.

Comments from NAB Chief Economist Alan Oster

SME business conditions fell in Q4, down 3pts to +11 index points (still above the long-run average of +6). Conditions were steady at +5 index points for the smallest firms, with the largest fall among mid-sized SMEs. Trading conditions edged lower but remained very strong at +22 index points, while profitability eased to +9 and employment to +1.

“Conditions eased somewhat across the board in late 2022 and that was true for SMEs,” said NAB Chief Economist Alan Oster. “Still, conditions were above average showing that the economy remained resilient through the end of the year despite headwinds.”

“The smallest firms continued to report the softest conditions in the survey but saw no deterioration between Q3 and Q4, with the easing concentrated among mid-sized SMEs,” said Mr Oster.

“SMEs conditions turned negative in the property sector but otherwise remained positive,” said Mr Oster. “Across the states SME conditions were strongest in Western Australia, Queensland and South Australia but remained robust in Victoria and New South Wales.”

SME business confidence fell 9pts to be in negative territory at -4 index points, and leading indicators softened. Forward orders declined 7pts to +2 index points and capacity utilisation also eased to 82.2%, down from a record 84.4% in Q3 and in line with softening among larger firms.

“Confidence fell in Q4 across our surveys, with concerns about the global economy, rate rises and high inflation weighing on the outlook,” said Mr Oster. “SMEs displayed the same falling confidence, which was evident across all industries and states.”

Cost pressures remain elevated. Purchase cost growth was 2.1% in quarterly terms, only slightly down from Q3, with 52% of SMEs reporting availability of materials as a constraint. Labour cost growth was 1.5%, also slightly lower than Q3, and labour remains a constraint for almost 80% of firms. Final prices grew at 1.5% overall and the sales margin index fell 5pts, to -13 index points.

“Supply chain issues and labour shortages remained a pressing concern for SMEs in Q4,” said Mr Oster. “Like larger firms, there was some evidence that cost pressures were easing late in the year but price growth remained very elevated.”

For more information, please see the NAB Quarterly SME Business Survey (December 2022)