Business conditions worsen for small and medium enterprises

Updated

Small businesses in general — and tradies in particular — have suffered a serious deterioration in their trading conditions and profitability, according to a survey from NAB.

Key points: Conditions, profits and orders fell sharply into negative territory and are well below average this year

The NAB survey found tradies with four or five employees are among the hardest hit

Tradies' business conditions are seen as an important leading indicator in the economy

The drop-off for small and medium enterprises (SMEs) was far sharper in the second quarter than for the bigger end of town, which was reported in NAB's broader business survey.

SME business conditions deteriorated further in the second quarter and are now negative and well below trend.

The survey also found the deterioration occurred across all firm sizes and across most states and industries.

Not surprisingly, the conditions are weakest in the property and retail sectors.

NAB chief economist Alan Oster described the results as "sobering".

"The things that worry us are, one, it [business conditions] has come down a lot, and two, it is particularly the small end of town that has come down a lot — and that makes us nervous," Mr Oster said.

"It's the tradies, and they tend to lead the economy — and that's not a good sign."

The quarterly SME survey is separate from the NAB's major survey and breaks the sector into three groups: low-tier (turnover $2-3 million), mid-tier (turnover $3-5 million) and high-tier (turnover $5-10 million).

'Multi-unit has really dried up'

Business conditions for tradies seem to depend heavily on where and in which sector they mainly work.

The ABC spoke with electrician Ray Sherriff earlier this year about conditions in the Sydney building sector.

Despite talk of a turnaround in house prices in the city, Mr Sherriff said not much had changed yet in the demand for electricians.

"Multi-unit domestic has really dried up," he observed.

"The builders that are doing reasonable [quality] stuff has not dried up, but the run of the mill has crashed."

While those who concentrate mainly on residential, and especially apartment, jobs struggle, Mr Sherriff said there is still a lot of work available in commercial and infrastructure.

"The big guys are flat out with infrastructure," he told ABC News.

"A lot of the guys that used to do multi-unit residential are now trying to price to do commercial," he said, adding that many of them were not up to the higher quality work demanded by large business clients.

As for his own business, which employs nine electricians and four apprentices, Mr Sherriff said his diversification between commercial and residential was keeping work flowing in.

"We're just ticking along, not setting any records."

Not all gloom

Sydney plumber Joel Surtees said his business has picked up noticeably since the federal election and his forward orders up to Christmas, if they all come through, would equal last year's turnover.

"The start of the year and the end of last year were terrible — tumbleweeds rolling down the street, that sort of thing — but since the state election there was a bit of an uptick, and after the federal election we're off again. I'm optimistic."

Mr Surtees has five employees at the plumbing business he started eight years ago.

"We do a lot of commercial work and we've now got more work orders than we have had in a long time," he said.

"There's now more certainty, the end of [financial] year capex decisions have been made and businesses are prepared to spend again.

"The residential market is less confident, but building a little momentum."

Leading indicators weaker

While there was a pick-up in SME confidence in the aftermath of the federal election and due to expectations of lower borrowing costs, Mr Oster said the most recent monthly survey showed confidence was unwinding again.

"We don't think this [higher confidence] will persist with conditions so low and forward indicators pulling back further," he said.

Worryingly for the future, most leading indicators are weaker.

Forward orders are negative, while expected business conditions and business investment on a three-month horizon have pulled-back, alongside a decline in capacity utilisation.

"Sales and trading continue to be the largest constraints on firm output — that is, demand for their products is weak — and this is reflected in pressure on margins, with costs growth continuing to outpace the growth of final products prices," Mr Oster said.

There is little good news on the jobs front either, with a sharp drop-off in "low-tier" firms with turnovers of $2-3 million and four to five employees.

"The employment index fell sharply and is quite negative. This suggests that sluggish demand that has been evident for some time is now feeding through to hiring decisions" Mr Oster said.

Conditions have weakened across all states over the past year but remain most favourable in Victoria, with all other states now in negative territory.

Western Australia remains weakest followed by New South Wales.

Topics: business-economics-and-finance, small-business, economic-trends, australia

First posted