Translating the data:
An economist's view on small business in 2013

The following is an excerpt from a recent webinar by Stephen Koukoulas, Economic Advisor to Dun & Bradstreet.

Listen to the recording and view the slides here >>

Small businesses heading into the second quarter of the year are facing a mixed economic picture, and this is one of low interest rates, a high dollar, multi-speed growth and subdued business sentiment - all of which have varying impacts on business profitability.

The economic outlook for the rest of 2013 is largely influenced by the conditions in 2012 and in the first quarter of 2013, both of which sets the scene for the issues and risks small businesses are likely to face during the rest of the year.

Global conditions were shaky in 2012

Looking at 2012, we can see that global growth was soft over the past year. Problems in the Euro-zone, the absence of a full recovery in the United States and a slowdown in China's economic activity all contributed to sluggish global growth of 2.3 per cent. In comparison, the Australian economy was doing better, at 2.7 per cent GDP growth, although unemployment ticked up to above five per cent and inflation fell below two per cent.

The world was also a riskier place to do business, with 24 per cent of countries downgraded in 2012. Almost half of all downgrades came from Europe, which was no surprise given the Euro-crisis. Eastern Europe and Asia-Pacific, however, were reasonably robust and accounted for 6.3 per cent and 12.5 per cent of all downgrades respectively.

Domestic economy was subdued

Turning to domestic business conditions, expected selling prices declined in December 2012 and this was indicative of a subdued economy and consumer sentiment. Typically, firms have problems putting up prices during a sluggish economic period and when consumer demand is low - in fact, they resort to discounting their stock. The subdued economy also meant that certain sectors suffered from downgrades, with firms in the mining, manufacturing and electric, gas and sanitary services sectors experiencing the highest proportion. In particular, manufacturing firms have suffered from a high dollar and global competitive pressure coming from cheap imports.

Consumers were also becoming more conservative, supported by D&B figures indicating just seven per cent were likely to spend on non-essentials. A reluctance to spend is generally reflective of a cautious consumer who may be worried about what is happening in the global economy. This feeds into a higher likelihood to save, with 30 per cent likely to do so in the December quarter 2012.

Economy will be in the 'grey area'

Heading into 2013, we see that the GDP growth forecast continues to be subdued, dropping to 1.5 per cent this year but is expected to jump to 2.5 per cent in 2014. Unemployment is also expected to further increase while inflation continues to be well-contained. While this shows the economy is not performing well, it isn't performing too badly either - it's in the "grey zone" between economic strength and economic weakness. The domestic picture is mixed and largely unexciting, which is not necessarily bad news.

Consumer financial stress is set to remain high, despite interest rate cuts and a propensity to save. This may reflect an unevenness in the economy, with some geographic areas feeling more stressed than others, for instance outside of the mining states of Western Australia and Queensland. Moreover, consumers are generally reluctant to apply for new credit products, consistent with a subdued economy and the theme of a "cautious consumer".

This theme runs through to business expectations for the June quarter, with firms pulling back their profit and capital investment expectations. Payment times have also been on the rise since 2012, although levels are not as high as those during the GFC. As for micro-businesses, payment times jumped to above 54 days in the March quarter, indicating increased financial pressure; while firms employing more than 500 staff only took slightly longer to pay their bills at 57.5 days. Typically, larger firms are slow payers due to more detailed accounting processes and bureaucracy, while SMEs tend to be quicker with their bill payments.

What does this all mean?

All this data points to an economy that is in fundamentally sound shape, although challenges remain. One of these challenges is multi-speed growth or a "patchwork" economy, which will likely continue through the rest of the year. Western Australia and Queensland will likely remain top performers, while New South Wales and Victoria will perform reasonably well. Tasmania and South Australia may struggle due to slow business activity.

Industry-wise, mining will likely slow down this year and this is consistent with RBA findings. Industries that will likely perform well are the services, finance and education sector. We are also seeing headwinds from the strong Australian dollar, which should see 1.10 in the next 12 months.

Another challenge will be cash flow pressures for smaller businesses, as reflected in the uptick in payment times. Often, small business finances are leveraged to personal homes and mortgages - and the fact that housing prices have been flattish over the last 18 months may also be another factor.

Interest rates will likely be on hold for the rest of the year as the three per cent cash rate is very accommodative, but could rise in 2014 if inflation picks up and unemployment comes down.

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