SME business confidence dropped for the first time in over a year in the March quarter, but remains at a relatively positive level overall. The drop was consistent with what we have seen from larger firms in the quarter as the exuberance seen since last year gradually adjusts to more subdued (although improving) levels of business activity (NAB Quarterly Business Survey). Nevertheless, low interest rates (and strong foreign buyer interest) have seen property markets perform well, contributing to confidence in property, construction and business/financial services firms, which remain among the most optimistic. Transport recorded a significant improvement this quarter, possibly reflecting signs of improvement in other domestic industries. Confidence was down across all the states, although still positive, with South Australia continuing to lag farthest behind. Confidence fell in mid and higher-tier firms, with only low tier firms recording a modest lift.
SME business conditions rose again in Q1, moving SME business activity up towards trend. Conditions improved for SME of all sizes, but low and mid-tier firms are still outperforming their larger counterparts. However, employment conditions deteriorated sharply for mid-tier SMEs in the quarter – despite higher capacity utilisation.
Conditions were mixed across industries in the quarter, but construction and retail improved the most. Conditions facing financial/business services are the most positive, reflecting trends in confidence, while manufacturing and wholesale are under-performing. SMEs are performing better than their larger counterparts in a number of industries – particularly in business/property services and construction – as well as reporting better conditions overall. Conditions rose across all states except WA, but are still very weak in SA.
Forward orders improved, suggesting a further lift in SME activity, although employment conditions remain weak despite some improvement.
Responses to a special question suggest that in the past twelve months, more than half of SMEs developed or improved their websites to improve competitiveness and/or looked to develop new products. Research & development and offline marketing have also grown in popularity as a strategy, suggesting that cost cutting may be reaching its limits.

The full NAB Quarterly SME Survey – March 2014, is available on NAB Research & Insights.