Confidence falls despite strong post-omicron conditions

However, SME business conditions rose to +13 index points in Q2, a strong level by historical standards, with trading conditions particularly elevated and profitability and employment both ticking higher.

Alan Oster, NAB group chief economist, said SME confidence continued to soften in Q2, back to around the long-run average.

“As is often the case, confidence is softest among the smallest firms. Confidence in the transport sector took a significant hit, likely reflecting the impact of higher oil prices,” he said.

“The fall in confidence came despite improvement in conditions, with SMEs of all sizes seeing conditions improve in Q2. SMEs in accommodation, cafes and restaurants saw a dramatic improvement in conditions, surging from a deep negative in the Omicron-affected Q1 to a strong positive level in Q2, and most other sectors were higher.”

Across the states, SME conditions improved everywhere except South Australia. Confidence fell sharply in Queensland and also fell in NSW and Victoria, but edged higher in Western Australia and South Australia.

Leading indicators rose in Q2. Capacity utilisation reached 84.4 per cent (similar to the rate among larger firms in the NAB Quarterly Business Survey), forward orders rose 4pts to +11 index points and capex rose 1pt to +9 index points.

Cost pressures remained elevated. Purchase cost growth (2.4 per cent), labour cost growth (1.4 per cent) and overheads (1.2 per cent) were all higher, with purchase costs running well above previous highs. Output price growth also rose, to 1.6 per cent. Still, the sales margin index improved 4pts, to -8 index points.

“As seen in surveys of larger firms, SMEs continue to face very elevated cost pressures, putting margins under pressure and pushing firms to increase prices. The pressure on margins is likely contributing to softening business confidence as firms consider how to remain profitable in a difficult set of circumstances,” Mr Oster said.

Labour and materials availability continue to constrain output for SMEs and larger firms alike. Around 80 per cent of firms reported availability of labour is a constraint and the share citing availability of materials as a constraint rose to more than 60 per cent, a new record level.

“Despite the headwinds from supply side constraints and energy and oil price increases, it appears SMEs are holding up fairly well for now,” said Mr Oster. “The challenge will be whether this momentum can be maintained over coming months as inflation and interest rates rise higher.”