Australia's domestic economy might be humming, but small business conditions are tough

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Australia’s 2015 fourth quarter GDP growth data showed a strong domestic economy with household consumption the key driver. But even with that strength in the local economy Australia’s vast small and medium enterprise (SME) sector is still struggling with tough business conditions.

That’s the message in the latest release of the Westpac-Melbourne Institute SME index for March. The index showed that current conditions for the SME sector are sitting at 88.6, well below the neutral level of 100.

“Despite a pessimistic assessment of current business conditions, SMEs across Australia are still hopeful of improvements in the near future as the reading of the Future Conditions Index stands at 105.3,” Westpac-MI said in a release accompanying the data.

That “step up between current conditions and confidence about the future may be reflective of the time of year, as many sectors move out of the post-Christmas lull,” Julie Rynski Westpac’s general manager of SME, told Business Insider.

“The lowest readings on current conditions were for agriculture, retail and construction, all sectors that have significantly lower activity through the Jan-March period,” she said.

The good news is that even though overall conditions appear subdued they are actually better than a year for metrics including business activity, sales, hours worked, and investment, Rynski added.

In the end the combination of current disquiet but an optimistic future saw the overall index print 97.0, much closer to the neutral level of 100.

But the survey shows the tension between overall business activity and sales, which are on the stronger side of the ledger, and profitability which has a much smaller net positive balance of responses. Thus the outlook for employment, in this sector, is positive but not overly strong.

All of that is in aggregate. But looking into industry and state based data there is clear evidence of a patchwork economy and mining boom hangover.

It’s clear in the break up that the two drivers of economic growth and employment, professional services, and health and aged care continue to be the strongest sectors of the economy.

But it’s the state-based data where the differences across the economy is most stark.

Western Australia is clearly undergoing a painful readjustment to a future less reliant on the mining boom. Queensland is also struggling with an economic transition.

“By state 44.3% and 46.7% of SMEs in QLD and WA reported a decline in profits, which is probably one of the main causes for their pessimism about business conditions in the last 3 months,” Westpac-MI said.

New South Wales is benefiting from the repointing of growth into sectors of the economy in which is strongest. While South Australia is showing remarkable strength given the headwinds facing its economy.

Overall the SME index is an almost perfect snapshot of the successes, headwinds, challenges, and disappointments being faced by Australian businesses and the Australian economy every day at the moment.

It all adds up to reasonable economic strength in aggregate but many sectors are struggling still.

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