SME business confidence eased again in the June quarter, but is holding up against heightened consumer anxiety with the support of positive sentiment in property and construction. Conditions rose slightly, but are still at levels suggesting sub-trend growth. SME’s are outperforming larger firms, particularly in construction and professional services. Forward indicators are mixed, but generally point to ongoing expansion in the near-term, although SME’s are becoming a little more concerned about factors affecting their 12-month outlook (especially government policy).
- SME business confidence eased again from the peaks seen around last year’s Federal election – consistent with ongoing sluggish domestic demand (including headwinds from tighter public spending and anxious consumers). These factors are far reaching, with confidence of larger firms falling by a similar degree in the quarter (NAB Quarterly Business Survey). Nevertheless, SME confidence is still positive, supported by enthusiastic property and construction firms. How long confidence levels can be sustained will largely hinge on how consumers respond to concerns about their financial wellbeing (particularly in light of the Commonwealth Budget). Despite some recent improvement, consumer confidence measures are very weak, while NAB surveys of consumer behaviour suggest a degree of spending restraint is on the way. It seems unlikely that firms will maintain current confidence levels if this manifests into a significant pull-back in consumer spending. In contrast to property and construction, health and retail firms are most concerned, both recording falls in confidence during the quarter.
- SME business conditions rose again in Q2, pushing the index back towards the series average; these levels still suggest only moderate growth in business activity. The improvement mostly stemmed from a rise in employment, while trading conditions fell. Conditions only improved for mid-tier firms, while low-tier firms declined, but SME’s are outperforming their larger counterparts.
- Conditions were mixed across industries in the quarter, but trends are broadly consistent with confidence. Construction and professional services are performing well, with SME’s in these industries also doing better than their larger counterparts. Retail recorded the largest fall in the quarter (followed by manufacturing and health). Conditions rose only in Victoria.
- Forward orders eased, but still suggest a moderate lift in SME activity. However, capacity utilization remains at soft levels, even after a solid improvement in employment conditions.
- 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. Meanwhile, price discounting and offline marketing have fallen in popularity as a strategy, suggesting that competitive pricing may be reaching its limits.