Australia’s small and medium-sized enterprises (SMEs) are often lauded as the backbone of the economy. Representing 97% of all businesses, SMEs employ 42% of the private-sector workforce and contribute nearly a quarter of the nation's economic activity. However, these businesses are currently facing significant economic challenges. MYOB’s newly released SME Performance Indicator sheds light on these issues, providing a detailed analysis of the economic health of SMEs across the country.
The SME Performance Score: A Measure of Economic Health
MYOB’s SME Performance Indicator, prepared by Impact Economics and Policy, is a new tool designed to measure the economic performance of SMEs in Australia. The SME Performance Score, introduced in May 2024, is -2.0, indicating that the small business sector is currently underperforming compared to the broader economy. This score is derived from the calculation of gross value added (GVA) for businesses with 1-19 employees, which is then aggregated for the entire small business sector. The GVA measures the value of goods and services produced, providing a clear picture of economic output.
The SME Performance Indicator uses data from over 200,000 anonymised businesses, comprising more than 17 million observations. This extensive dataset offers the most comprehensive and up-to-date insights into the performance of Australian small businesses. According to Paul Robson, CEO of MYOB, the recent period of softness in the SME sector highlights the challenging conditions these businesses have been facing since late 2023 .
Sector Sensitivity and Employment Impact
SMEs are more sensitive to economic cycles and quicker to respond to changing conditions than larger businesses. This sensitivity makes them a vital indicator of broader economic trends. The SME sector's economic contribution is significant, employing 5.4 million out of 12.9 million private sector workers in Australia .
One of the main challenges SMEs face is the lack of a substantial cashflow buffer. Higher borrowing costs, elevated interest rates, and increased cost-of-living pressures have particularly affected small businesses. These factors have forced many SMEs to pass increased costs onto their customers, contributing to reduced consumer spending on non-essential goods and services .
Industry-Specific Performance
The SME Performance Indicator provides detailed insights into how different industries are faring. Here are some key findings:
- Agriculture: Gross Value Added (GVA) rose sharply during FY2022-23, buoyed by record-high production across a range of crops and livestock. Expectations of near-record production for FY2024-25 suggest GVA will continue to track at high levels for the near future (Page 20, "Key Sectors").
- Information, Media, and Telecommunications: GVA increased since the end of 2021. This growth is attributed to businesses upgrading IT systems to improve productivity amidst elevated cost pressures (Page 21, "Key Sectors").
- Construction: GVA decreased over the past 12 months. This decline reflects the impact of cost pressures and economic conditions on the industry (Page 22, "Key Sectors").
- Retail: The sector has experienced minimal growth since the end of 2021, with GVA declining over the last two years. Cost-of-living pressures and mortgage rate rises have significantly impacted consumer spending on non-essential goods, leading to challenging trading conditions for retail SMEs (Page 21, "Key Sectors").
- Health: GVA spiked during the height of the COVID-19 pandemic due to a surge in demand for health services. These services were less affected by lockdowns and other restrictions. After retreating from those elevated levels, GVA has since trended to track population growth, which has been strong since the end of 2021 (Page 20, "Key Sectors").
Expert Insights
Paul Robson emphasises the importance of understanding SME performance to gauge the overall economic health of the nation. "The SME Performance Indicator tells us how the small business sector is performing compared to the Australian economy, and the industries most impacted give us insight into why this might be down compared to GDP," he says .
Dr Angela Jackson, Lead Economist at Impact Economics and Policy and Women in Economics National Chair, underscores the significance of the SME Performance Indicator as a resource for decision-makers. "The indicator provides an authoritative new resource for decision-makers in the private sector and government, leveraging data to provide valuable insights on the performance of the small business sector and its role in the economy," Dr Jackson explains .
Economic Contribution of SMEs
Australian SMEs are a cornerstone of the economy, representing 97.3% of all businesses and contributing nearly a third of the nation's GDP. According to the Australian Small Business and Family Enterprise Ombudsman (ASBFEO), SMEs account for 97.3% of Australian businesses, with small businesses (0-19 employees) making up the vast majority. The breakdown is as follows:
- Small businesses (0-19 employees): 97.3%
- Medium businesses (20-199 employees): 2.5%
- Large businesses (200+ employees): 0.2%
Furthermore, SMEs account for 44% of Australia's private sector employment and 35% of total GDP. This aligns with findings from the MYOB SME Performance Indicator, underscoring the critical role of small businesses in driving economic activity and employment
According to the ASBFEO report, over half (61%) of Australian businesses are self-employed or non-employing. An additional 27% of businesses employ 1-4 people, and 9% employ 5-19 people, all classified as small businesses under the ABS definition. This distribution highlights the predominance of micro and small enterprises within the Australian economy.
In terms of turnover, the vast majority of small businesses have a turnover of less than $2 million. Specifically, 92% of businesses fall into this category, with a significant portion having annual turnovers below $200,000. This indicates that while many SMEs are small in scale, their collective impact on the economy is substantial.
Challenges Facing SMEs
Cost Pressures and Cash Flow
In 2022, the Australian Bureau of Statistics (ABS) reported that cost pressures have significantly impacted SMEs. Many small businesses are experiencing increased costs of goods and services, higher wages, and rising interest rates, which strain their cash flow and operational viability . A recent survey by the Reserve Bank of Australia (RBA) highlights that SMEs are particularly vulnerable to cash flow issues, with 28% of respondents indicating that cash flow is a major concern for the coming year .
Borrowing Costs
Higher interest rates have increased the cost of borrowing for SMEs. According to the Reserve Bank of Australia (RBA), the average variable rate on new loans to SMEs has risen by around 360 basis points since the start of monetary tightening in May 2022. This is slightly lower than the 400 basis point increase for larger businesses. The impact of these rising costs is reflected in the MYOB SME Performance Indicator, which shows a downturn in economic activity and reduced GVA in several sectors.
Additionally, smaller businesses typically face higher borrowing costs than larger businesses. This is partly because small businesses are more likely to default on loans. On average, interest rates for SMEs were about 65 basis points higher than for large businesses in June 2023. This spread is historically low, mainly because a higher share of SME credit was fixed at low interest rates during the pandemic, and some of these loans have yet to roll over onto higher rates. Currently, around one-third of small business credit is on fixed rates, compared to less than 10% for large businesses
Industry-Specific Performance
Retail Sector
The retail sector has faced significant challenges due to reduced consumer spending on non-essential goods. According to the Australian Retailers Association (ARA), retail sales growth has been modest, with February 2024 showing a year-on-year increase of only 1.6%, reflecting ongoing cost-of-living pressures. ARA CEO Paul Zahra noted that while there has been some growth in areas like clothing, footwear, and accessories, the overall pattern of low growth is concerning for retailers. This aligns with the MYOB SME Performance Indicator's findings that retail GVA has declined by 10% over the last two years, influenced by cost-of-living pressures and mortgage rate increases. Zahra also highlighted that the growth achieved is largely due to population increases rather than an actual rise in consumer spending, emphasizing the challenging period for discretionary retail sectors.
Construction Sector
According to a report released last March by Australia Bureau of Statistics, output prices in the construction industry rose due to ongoing skilled labour shortages and higher manufacturing costs. This quarter saw a 0.9% rise in final demand, with significant contributions from property operators, tertiary education, and building construction. Key contributors to the increase in house construction costs include higher prices for plaster products, aluminium windows, and ceramic tiles, despite a decline in timber prices.
The Altus Group's Q1 2024 report on Australian construction material prices reveals:
- Materials Decreased: Bricks and structural timber.
- Materials Stable: Concrete and reinforcing steel.
- Materials Increased: Plasterboard, structural steel, copper, and aluminium.
Key statistics include:
- Bricks down by 2.5%, timber by 1.8%.
- Concrete and reinforcing steel prices unchanged.
- Plasterboard up by 6.7%, structural steel by 4.5%, copper by 3.9%, and aluminium by 5.3%.
Factors influencing these trends are housing affordability issues, record migration rates, and challenges in meeting government housing targets.
Agriculture Sector
The agriculture sector has shown resilience, with a 14% increase in GVA over the past year. This growth is driven by record-high production levels across various crops and livestock, supported by favourable weather conditions and strong export demand . The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) projected in 2023 a continued growth in agricultural output, albeit with some volatility due to climate risks .
Regional Insights
Western Australia's strong performance, with a 19% increase in GVA since early 2020, is notable. This growth is attributed to elevated commodity prices, which have bolstered household consumption and public spending. According to the Western Australian Department of Treasury, the state has benefited from strong global demand for iron ore and other minerals, driving economic growth.
Moreover, the MYOB SME Performance Indicator highlights that household consumption in Western Australia has grown at double the pace of New South Wales and Victoria since the end of 2019. This significant increase in consumer spending has supported small businesses across various sectors, including retail, which contrasts with the general performance of the small business retail sector in other states.
Additionally, Western Australia's small businesses have been less affected by some of the economic challenges faced by their counterparts in other states. The strong performance in the mining sector, coupled with the state's effective management of COVID-19 restrictions, has contributed to a more robust economic environment for SMEs.
However, the recent retreat in commodity prices suggests that the gap between the economic performance of Western Australia and other states might narrow. As commodity prices stabilize at lower levels, the state’s SMEs could face similar challenges as those in other regions, such as increased borrowing costs and consumer spending pressures.
These insights underscore the importance of regional economic conditions in shaping the performance of SMEs. The strong correlation between commodity prices and economic activity in Western Australia highlights the critical role of external market factors in influencing local business environments.
Final Take
The MYOB SME Performance Indicator reveals significant challenges facing Australia's small and medium-sized enterprises (SMEs), which are pivotal to the nation's economic health. The underperformance of SMEs, indicated by a score of -2.0, underscores the need for immediate action to support these businesses. Encouraging investment in technology can help SMEs boost productivity and efficiency. Additionally, advocating for policy changes to ease cost pressures and improve access to affordable financing is crucial. Strengthening networks and fostering collaboration among SMEs will enable them to share resources and best practices. By enhancing workforce skills through targeted training programs, SMEs can improve their competitiveness.
Understanding the Economic Health of Australian SMEs: Insights from MYOB’s SME Performance Indicator