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Small Australian businesses are optimistic about what the future holds

Richmond Tigers fans are perennial optimists. Photo: Adam Trafford/AFL Media/Getty Images.

Smaller Australian businesses remain optimistic about what the future holds, according to the latest Westpac-Melbourne Institute Small and Medium-sized Enterprise (SME) Index.

The Index rose 3.2% to 100.7 in the September quarter, leaving it above the 100 level that indicates that optimists outnumber pessimists for the first time this year.

“Business confidence continues to be anchored by a positive outlook for future conditions, as SMEs reported weak current conditions, dropping 3.2% since last quarter,” said Westpac.

“The detailed survey responses suggest the slight decline in sentiment towards current conditions reflects continued pressure on profitability and increases in overheads and costs.”

So it’s perceptions about what the future holds, rather than what was seen in the ground during the quarter, that’s got a small majority of businesses excited during the quarter.

As Westpac explains, despite widespread concerns about the health of household finances and the imminent arrival of Amazon in Australia, firms remain optimistic on the outlook for trading conditions, including the retail sector.

“Despite another challenging quarter, SMEs are strongly optimistic about future conditions as they approach the holiday season,” it said.

“As expected, consumer-facing industries such as wholesale and retail trade and hospitality and recreation services were among the most optimistic. However, other sectors such as manufacturing and health and aged care services also reported higher levels of confidence.”

By location, confidence levels soared in Victoria and New South Wales during the quarter, masking weakness in other mainland states.

Confidence in Victoria jumped 25.7% to 101.4, while New South Wales also logged an impressive gain of 8.3% to 109.1.

“This likely reflects developments in the housing sector, with fears of a hard landing in New South Wales and Victoria easing somewhat,” said Matthew Hassan, senior economist at Westpac.

However, while confidence levels soared in Australia’s most populous states, the news was a little more dour for other parts of the country.

Falls in confidence were reported in Queensland (-11.2% to 93.9), Western Australia (-18.8% to 90.1) and South Australia (-17%) which recorded the lowest reading of 84.1.

“Some of this likely reflects… conditions in Queensland and Western Australia failing to meet earlier expectations of a recovery,” Hassan said.

“Pressure from rising overheads and costs is also a common theme across all SMEs. The state detail here suggests the underlying concern is around recent sharp increases in energy costs with SMEs in South Australia — the state being most heavily impacted by energy concerns — reporting particularly high levels of concern.”

Clearly it’s not just households that are concerned about the “bill shock” from higher energy prices that will arrive in the weeks ahead.

This increase operating costs as well as carry the potential to limit household spending on discretionary goods and services.

However, despite that threat, Hassan said it was pleasing to see an uplift in business confidence despite difficult trading conditions, noting that firms intend to lift hiring and investment levels in the year ahead.

“SME owners expect to see the number of staff in their business grow within the next 12 months, and the Index found a large number of SMEs are continuing to increase their levels of investment,” he says.

That outlook suggests recent strength in employment and capital expenditure plans can be seen in small Australian businesses as well as large ones.

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