SME sentiments positive heading to the close of 2017

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The Westpac-Melbourne Institute SME Index (the Index), which examines the economic health of Australian small and medium sized enterprises (SMEs), shows business confidence is in slight positive territory heading into the holiday season. The Index rose from 100.7 in Q3 2017 to 101.8 in Q4 2017.

The uplift in confidence is being supported by a solid improvement in business conditions, with the Current Conditions Index increasing 11.9 per cent on last quarter. The detailed survey responses suggest the considerable increase in sentiment towards current conditions reflects improvements in sales and profits. This is the first time Australian SMEs have reported positive business conditions since March 2016.

However, according to the Index, it said that SMEs are feeling less optimistic about future business conditions than three months ago; the Future Conditions Index recording a decrease of 7.9 per cent. However, it remains in positive territory (101.4) and despite the fall, one in three SMEs have invested more into their businesses and nine out of 10 have retained or hired more staff in the past year.

Interestingly, overall optimism (Current and Future Conditions) in the Construction industry jumped 16.4 per cent over the quarter, with an increase in the volume of non-residential building offsetting a small decline in residential work. Other sectors such as Manufacturing and Professional Services also reported high levels of overall confidence. 

Westpac general manager of SME business banking, Ganesh Chandrasekkar, said: “There is a steady level of optimism amongst Australian businesses this quarter, driven by positive sales and profitability. Though performance is buoying business confidence, SMEs have a less optimistic outlook for the year ahead.”

The last quarter of the year saw significantly strong gains in sentiment across two major states, with an increase of 28.4 per cent in Western Australia (115.6) and 28.2 per cent in South Australia (107.9). Victoria also saw an increase in sentiment of 9.2 per cent (110.7). The only major state to report a drop in confidence was New South Wales (down 13.7 per cent to 94.2).

Westpac senior economist, Matthew Hassan, said: “While the headline Index is a welcome positive read from SMEs, clearly there is a lot going on in the sector with doubts about the extent to which the strengthening in conditions will be sustained and a highly uneven picture across states and industries. For now positives are outweighing negatives but the year ahead looks more uncertain.”

Across industries, the SME Index was strongest for the Professional Services sector which rose 4.9 per cent (120.9), Construction (113.8),Manufacturing (107.9) and Health & Aged Care Services (103.7), with each sector experiencing gains in sales and expecting business conditions to improve over the coming months.

“The mixed sectoral performance speaks to some key themes in the wider economy. Much of the strength is coming directly and indirectly from elevated construction activity and rapid growth in demand for health services. Weakness looks to be concentrated in consumer-related sectors. The uncertain outlook for the Construction sector and concerns that the surprise softening in consumer demand seem to be the main factors dampening SME optimism,” Hassan added.

When asked about customer service, the Index revealed that SMEs believe the greatest barriers stopping them from delivering great customer service are limited staff and resources (39.9 per cent), and bureaucracy such as approval levels (37.8 per cent). 

Chandrasekkar concluded: “SMEs need to rediscover where consumers are and think outside the box to better communicate with them, to build customer loyalty and understanding.

“We are seeing a shift in perceptions and the way businesses connect with their customers. With the growing presence of online businesses, emergence of robotics and artificial intelligence, and the Internet of Things; it’s not surprising that consumers expect businesses to change tack.

“Australian SMEs are responding to this shift. Our customers are telling us that the ease of access and speed of support is an extremely important driver in providing good customer service. Our Index showed that 58 per cent of businesses believe social media is an important tool for customer service, so it’s clear that this channel plays an important role in engaging customers and providing a tailored and prompt service.”

According to the SME Index, 43.8 per cent of businesses are looking to increase their focus or invest more on social media as a tool for customer service in 2018.