Operating conditions for Australian SMEs are the best they've been in years

Photo: Carl De Souza/ AFP/ Getty Images

Operating conditions for small and medium sized Australian businesses (SME) haven’t been this good in six years.

That’s the finding of the latest SME quarterly survey, released by the National Australia Bank on Thursday, with the index measuring conditions rising 2 points to +6 in the June quarter, leaving it at the highest level seen since 2010.

It is now comfortably above the series long-run average of +4.

“All three components of business conditions rose in the quarter,” said the NAB. “Trading and profitability conditions surged ahead, reaching levels not seen since 2009.

“It is especially encouraging that low and mid-tier firms reported notable improvements in conditions and confidence in the quarter. In particular, low-tier firms reported positive business conditions for the first time in 2 years,” it added.

The NAB survey is broken down into three categories: low-tier, mid-tier and high-tier, based on sales turnover. Low-tier firms are deemed to $2-3 million annual turnover, with mid and high-tier firms reflecting sales of $3-5 million and $5-10 million respectively.

Outside of trading and profitability, the news elsewhere was largely pleasing, particularly when it came to the outlook for activity levels.

“Leading indicators were stronger in the quarter as well, with capacity utilisation rising to levels last seen in 2011, while capex reached the highest level since 2007,” said the NAB.

“Overall, SME input price indicators point to relatively contained price pressures, while easing price growth for retailers is consistent with the subdued inflation outlook.”

If there was a disappointing outcome to arrive in the report, it came from employment conditions which the NAB described as “subdued”.

“So far, strong trading and profitability conditions have had limited impact on SME labour demand, with the employment index only rising by 1 point to -1, mired in negative territory for the seventh consecutive quarter,” it said.

“The lack of momentum in SME employment conditions are seemingly at odds with the relatively more robust employment conditions reported by general businesses in the QBS [NAB quarterly business survey] and official employment data from the ABS, possibly reflecting weaker financial capacity of SMEs to hire new employees or a greater difficulty for them to find suitable labour.”

By location, and perhaps unsurprising given other data points, operating condition in non-mining states fared far better than in those more aligned with mining.

Mirroring the improvement in the conditions index, the survey’s separate confidence measure also improved, rising to +5 from +1 in Q1. It too sits well above its long-run average of +2.

While the NAB stresses that the survey was conducted prior to the UK Brexit vote and Australia’s federal election, something it acknowledges may “not reflect the possible shifts in sentiment due to these political events”, it points out that the latest NAB monthly business for June — conducted during the Brexit carnage in financial markets — “did not show an adverse impact on confidence”.

With SME confidence and conditions both posting healthy increases during the quarter, Alan Oster, chief economist at the NAB, was understandably chuffed at the result.

“This survey provides more evidence that the positive effects of the broadening non-mining recovery are spilling over into smaller businesses. While SMEs have continued to lag behind the broader business community, the gap between them has narrowed,” said Oster, following the release of the report.

“Also encouraging is that better conditions were recorded by most industries. While tertiary services such as health, business and financial services have performed well for some time, intermediate services such as wholesale have been playing catch-up in the last two quarters as well.”

The survey result, along with other economic data points, underlines the dilemma confronting the Reserve Bank of Australia when it comes to the outlook for interest rates.

Outside of inflation and elevated levels of labour market slack, the vast majority of other releases suggest that the domestic economy — particularly the east coast housing market — is not in need of any additional monetary policy stimulus at present.

The Reserve Bank of Australia next meets to discuss interest rates on August 2. Markets are evenly divided as to whether or not it will cut rates to a fresh record-low of 1.5%.

Here are just a few of the interesting charts contained in the NAB’s quarterly SME report.

Business conditions and confidence by state.

Business conditions and confidence by industry.

Business conditions individual components.

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