Multi-speed SME economy highlights the policy dilemmas and opportunities

While 67 per cent of SMEs expect positive growth, at the other end of the scale some tip their revenue to fall by an average of 9 per cent.

Small and medium-sized enterprises (SMEs), which account for 97 per cent of all businesses in Australia employing nearly eight million people, represent a true barometer of the state of the Australian economy.

For the past 10 years, ScotPac has twice a year gauged the growth prospects and sentiment of Australia’s economic engine room through our SME Growth Index. Our latest survey indicates a decidedly mixed outlook for SMEs and the wider economy, reinforcing the fact that Australia’s economy consists of many different economies within one.

The implications for government policy at both federal and state levels are clear. A “one size fits all” approach to SME policy settings and support programs is not going to be effective in addressing localised issues that have impacts for our broader economy. A more flexible and dynamic approach is needed.

So, what are SMEs telling us?

One thing is clear, Australian SMEs are resilient. Despite an environment of continuing high inflation and rapidly escalating wages and interest rates, a remarkable 57 per cent of SMEs are predicting positive revenue growth in the next six months. The average rate of growth forecast is an even more remarkable 8 per cent; the strongest in a decade.

But there is stark evidence that we have a two-speed economy at play in Australia. At the other end of the scale a record 32 per cent of SMEs predicted their revenue would fall in the next six months, by an average of 9 per cent. This sentiment gap represents the largest divergence of revenue projections in the history of ScotPac’s SME Growth Index.

What is driving this divergence? We know for a fact that location has a major bearing on SME revenue forecasts.

In the resource-rich states of Western Australia and Queensland an overwhelming proportion of SMEs are bullish about the future, with 92 per cent and 84 per cent respectively predicting revenue growth. This is understandable when you consider the export demand and supply chain impacts that result from activities like iron ore and lithium mining to support global battery manufacturing.

But the picture is much bleaker in Victoria, with 69 per cent of SMEs forecasting a decline in revenue to March 2024, and just 17 per cent anticipating sales growth. This pessimistic outlook, by far the worst in the country, is a big concern for a large state economy that employs millions of people in sluggish sectors like construction, manufacturing and professional services. Some form of policy intervention, perhaps in the form of targeted stimulus, is needed to revive the flagging fortunes of SMEs in our southern capital.

A further standout observation is the revenue forecast comparisons between SMEs in regional Australia and their counterparts in the cities. Regional SMEs are more optimistic, with 58 per cent anticipating revenue growth and just 17 per cent expecting a decline in sales. That compares to 56 per cent of metro SMEs forecasting growth but nearly 38 per cent expecting a sales decline.

This is great news for regional businesses, but it also represents a golden opportunity for collaboration at federal, state and local level. The relentless increase in the cost of doing business is being more acutely felt in urban areas, particularly in areas like rent, tolls and wages. With net migration now running north of 450,000 per annum, and housing in short supply in our capitals, there could be no better time to seriously resource and promote an SME Regional Relocation program. While there has been a smattering of similar low-key programs in various States in recent years, the time is now ripe for a dynamic, co-ordinated approach that could solidify regional growth and relieve the pressure valve for many SME owners.

A further theme to emerge from the SME Growth Index brings with it a note of caution. Historically low unemployment figures released last month were heralded by the federal government as great news for the economy. While the headline numbers were no doubt impressive, a deeper dive found part-time jobs accounted for 96 per cent of the increase in employment, and total monthly hours worked declined despite the rise in participation.

In response to a question about wage pressures resulting from award and minimum wage increases that took effect in July, two thirds of Australian SMEs said they planned to hire less new employees, and the same proportion said they would reduce the hours of existing employees. Four per cent said they were being “pushed over the edge” and were likely to close. This sentiment is likely to be evident in future employment data.

Again, wage rises are unlikely to impact SMEs in WA and Queensland that are currently riding high off the back of Australia’s resources boom. But if struggling businesses in Victoria that employ millions of people start shedding jobs or employee hours, there is a risk that the national economy could suffer.

In an uncertain economic environment, it is critical for SMEs to seek professional advice to best manage these challenges. But it is also incumbent on government at all levels to monitor SME growth sentiment and retain a level of flexibility in policy settings so that appropriate action can be taken as and where it is needed. Again, a good starting point would be seizing the jobs momentum in our regions by creating incentives for SMEs to relocate from areas plagued by population pressures. And to avoid a further erosion of confidence in Victoria, an expert working group with SME industry representation is urgently needed to design and deliver a meaningful package of support in struggling sectors.

Jon Sutton is chief executive of ScotPac, Australia and New Zealand’s largest non-bank SME business lender