Omicron weighed on SME conditions and confidence in Q1

After a strong rebound in Q4 of 2021, the index softened 6 points across SMEs of all sizes, although it remains in positive territory across all subgroups.

Alan Oster, NAB Group chief economist said the impact of the omicron outbreak on SMEs was evident in the Q1 survey, just as it was for larger firms in the bank’s quarterly survey, with confidence softening from the high levels reached at the end of 2021.

SME business conditions also eased, down 5 pts to +6 index points. The largest fall was among high-tier firms, which had reported very strong conditions in Q4, but SMEs of all sizes saw conditions soften and low-tier firms continued to report the weakest conditions at +5 index points.

“Conditions also eased for SMEs in Q1, with trading conditions and profitability down,” said Mr Oster. “SMEs reported weaker conditions in every state, with the largest falls coming in South Australia and Western Australia.”

Conditions deteriorated the most in property and construction, while the transport and finance sectors edged up. However, conditions remained fairly strong across most sectors but remain heavily negative in accommodation and food (-17 index points) and also slipped to around zero in health and manufacturing.

“Unfortunately, conditions remained very weak for SMEs in the hospitality sector, which has continued to face disruptions from the pandemic,” said Mr Oster. “SMEs in the property and construction sectors also saw conditions slip in the quarter, which could reflect a range of factors impacting the property market, including Omicron as well as slowing house price growth.”

Additionally, costs remained elevated with purchase cost growth (2 per cent), labour cost growth (1 per cent) and overheads (0.4 per cent) all remaining virtually unchanged from Q4, with purchase costs in particular running at historically very high levels. Prices also rose (up 1.4 per cent, similar to Q4), but overall that left margins under pressure with the sales margin index little changed at -10 index points.

“As we have seen in all our business surveys, SMEs are facing very elevated cost pressures and this is translating to price increases, although margins remain under pressure. Labour and materials availability continue to be a constraint for a large share of firms,” Mr Oster said.

“Still, our expectation is for the economy to continue to strengthen over coming months which should help SMEs to recover from the disruptions earlier in the year.”