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Australian small businesses continue to do it tough, at least compared to larger rivals

<> on March 15, 2016 in New York City.

Smaller Australian businesses continue to do it tough compared to larger rivals, according to a new report released by the National Australian Bank earlier today.

The bank’s quarterly SME business survey revealed that operating conditions for smaller firms remained “stable but subdued” into the first quarter of 2016 with the smallest firms “facing the most challenging conditions”.

The survey’s business conditions index held at +3 during the quarter, slightly below the series long run average of +4.

According to the NAB, outside of New South Wales and Victoria — the largest states in terms of population size and economic output — conditions elsewhere in the country all improved.

“On a state by state basis, New South Wales and Victoria remain the most resilient in terms of business conditions, but we were positively surprised by the strong gains in Queensland which recorded its first positive reading in 2 years,” said Alan Oster, chief economist at the NAB.

“This offers another indication that the non-mining recovery is gaining momentum.”

The chart below, supplied by the NAB, looks at the divergence in operating conditions and confidence across the country.

Mirroring the trend in the NAB’s broader business survey, conditions in the services sector remained buoyant, although there was a noticeable deterioration recorded in those firms operating in sectors tied to Australia’s housing market.

“Services sectors continued to outperform more traditional sectors in the quarter, although some of the earlier strong performers, such as finance, business and property services, appeared to have lost some momentum in Q1,” said Oster.

“This potentially reflects a slowing housing market nationally which is placing some pressure on small businesses in property and finance sectors in particular, and their conditions could worsen if the housing market cools further.”

Oster also noted that services targeted at households and tourists, such as health and accommodation, continued to perform “very well”.

The chart below looks at operating conditions by individual sector, comparing the results to the broader NAB business survey.

Suggesting that operating conditions could improve further in the coming quarters, forward-looking indicators such as capacity utilisation and new orders improved slightly, with the latter remaining well above the survey’s long-run average.

Expectations for capital spending also improved — mirroring the increase in the bank’s broader business survey — suggesting firms may increase investment in the quarters ahead.

Despite the conditions index holding steady and forward-looking indicators continuing to improve, the survey’s confidence gauge fell modestly, declining to 0 from +3 in the December quarter 2015. It too was below the series average of +2.

The NAB suggested that the deterioration may have been caused by increased concerns about financial market volatility and slowing global growth prospects.

Though the NAB remains confident about the outlook for Australia’s economy and labour market, particularly on the east coast, it is one of the few to forecast a rate cut from the RBA when the bank next meets on May 3.

“This is a really fine judgement on our part of a 55%/45% chance of a cut, reflecting the Bank’s ability to do slightly more to reduce Australia’s unemployment rate given the low inflation environment in Australia revealed by yesterday’s very low core CPI outcome and the prospect that in the near term at least, core inflation will run below the RBA’s target range,” said Oster.

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