Our prosperity is built on small business

Nowhere is the small business sector the ‘backbone’ to the economy more so than in the construction industry.

The property industry delivers this nation’s entrepreneurial spirit.

Two weeks ago, I wrote about the exponential rise of sole traders who surged by 65,000 last financial year, up from 10,000 just five years earlier.

Further analysis revealed that many of these new businesses are connected to the gig economy: possibly Uber drivers with freshly-minted ABNs. Today I want to focus on the next level up in the business hierarchy: small businesses employing 1-19 workers.

As at June last year, there were 823,000 such businesses in Australia employing, by my estimates, six million workers or close to half the nation’s workforce.

Over the preceding decade which included the mining boom and the global financial crisis, the small business life form expanded by 80,000 supporting about half a million jobs. Politicians take note — get the policy settings right and small business has the capacity to make you look real good.

Small business survival rates are a kind of barometer to economic prosperity. In the 2009 financial year 13,000 small businesses ceased to exist. In the 2016 financial year 16,000 small businesses burst into life setting the scene for unbridled optimism and for rising employment at the time of the last federal election.

We won’t get another estimate of small business numbers prior to the May election but I think that the tracking annual growth rate is subsiding and right now could sit at below the 10,000-mark. The September 2016 election was held in a rising market; the May 2019 election will be held in a subsiding market shaking the confidence of half the workforce and impacting households containing maybe two-thirds of voters.

If I was a politician, I’d be promising to deliver all sorts of good stuff to workers working in small businesses and who “feel” that things are slowing down and who might be concerned about keeping their jobs. I’d also be looking at ways of underpinning the continued rise of the small business sector.

And nowhere is the small business sector the “backbone” to the Australian economy more so than in the construction industry. There were 153,000 small construction businesses employing 1-19 workers in Australia last June, up 5000 over the previous 12 months. It is the property industry, minister, that delivers this nation’s entrepreneurial spirit and that accounts for almost half of all small business growth.

Beyond construction the biggest small business sectors are professional services (117,000 businesses), retail trade (69,000) and accommodation (61,000). Builders, plumbers, electricians and carpenters, plus professionals like doctors, accountants and solicitors, as well as shopkeepers and hotel and motel operators, all employ workers and all require commercial premises in every city, suburb and town. It is businesses like these that form the beating heart of our prosperity and that sit at the base of the business-employing pyramid.

Not all small business segments are expanding. Farmers and shopkeepers each contracted by more than 900 enterprises over the 12 months to June 2018. Farms are getting bigger and retailing is shifting online.

Non-standardised product or service delivery is where small employing businesses are expanding, delivering bespoke housing solutions and one-on-one medical advice. Personally, I think that small accounting and compliance legal firms will need to reinvent themselves within the next 10 years.

It is instructive that almost half of the net new small employing businesses created in Australia last year were added within Greater Sydney (up 5628 establishments) and more than a quarter were added within Greater Melbourne (up 3470). These two cities are driving Australian prosperity and employment growth; the mindset here would be quite different to the mindset elsewhere.

In NSW and Victoria, the place where most net new small employing businesses is being created is the CBD: the Sydney CBD added 396 net new small businesses (up 3 per cent) last financial year; the Melbourne CBD added 336 (up 5 per cent).

In Queensland the leading small business growth centre wasn’t the CBD (up 69 or 2 per cent) but rather it was North Lakes, up 115 or 18 per cent.

In Western Australia the Perth CBD doesn’t even rank within the state’s 10 most popular locations for small business growth. Rather it’s the building hubs of Forrestdale, up 49 or 13 per cent, and Helena Valley, up 38 or 43 per cent.

Yes, there is small business growth spread across the Australian continent and based on June 2018 figures the overall numbers are still quite high.

But they are substantially underpinned by the construction industry which has slowed over the last nine months. And there is a discernible difference between business formation rates in Sydney and Melbourne and in resource states: small business activity in our biggest cities is focused on CBD and professional services; elsewhere, they’re lifestyle or building focused.

In Tasmania the leading places for small business growth were Huonville, up 35 or 20 per cent, and Margate, up 31 or 16 per cent.

In South Australia the Adelaide CBD still generates most net new small businesses (up 48 or 1 per cent) but also on the rise are places like Mitcham (up 38 or 10 per cent) and Port Pirie (up 34 or 13 per cent).

It will be February 2020 before we know how business formation rates shifted this financial year. And I suspect it will all be so obvious in hindsight along with the election results including the seats that changed hands. But from a March 2019 perspective and based on data to hand we seem mightily dependent upon the property industry for employment growth and for entrepreneurial optimism. And which in turn depends on immigration settings.

There is evidence of a rising pool of small employing businesses — a kind of start-up culture if you like — emanating from the Sydney, Melbourne and even the Adelaide CBDs. But this is not the narrative in Perth or Hobart or Canberra or Darwin. It kinda is in Brisbane, but it has further to develop before it beats business growth in a suburban masterplanned community like, say, North Lakes.

In an ideal world capital city CBDs would act as business incubators creating and forging new enterprises that eventually scale up and succeed. Given the scale of the immigration program there should be new businesses constantly being formed in the growth suburbs of capital cities. But if we are to cultivate a culture of entrepreneurship then we need stronger small-business hubs delivering measurable net new employing businesses in the smaller states and territories.

Let’s not have Sydney and Melbourne suck-up all the nation’s entrepreneurial talent; let’s create more employing businesses in places like Perth, Hobart, Darwin and Canberra. And let’s also monitor and report on this most empowering of metrics every year.

Bernard Salt is managing director of The Demographics Group.
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