Our SMEs in a world of pain

Any lingering thoughts Reserve Bank directors might have harboured to lift interest rates next week will have been wiped out by the disturbing Sensis Business Index released this morning.

And, given the gathering intensity of the non-mining downturn – vast areas of Australia are in recession – prudent Reserve Bank directors should have rate rises off the agenda in coming months, unless for some reason there is a huge spike in inflation. It's time to start thinking about interest rate reductions.

What really worries me about the Sensis survey is that it shows too many small and medium businesses are managing the downturn badly and running down their capital via lower profits. Expect a large rise in business failures as a result.

The Sensis or Yellow Pages Index is Australia's biggest survey of small and medium-sized businesses and covers some 1,800 enterprises around the nation. Small and medium sized-enterprises are the biggest employers in the nation and, at least among smaller enterprises, when the boss is unhappy with the government, employees become nervous and follow in the same direction.

The survey shows that small and medium sized-businesses are lowering their carbon emissions and are concerned about carbon, but an incredible 64 per cent of them are opposed to a carbon tax. Only 26 per cent support it with 10 per cent undecided. Moreover, 53 per cent say it will harm their business. The government's carbon tax timing is appalling.

Not surprisingly, while last February just over one-third of small and medium sized-businesses (36 per cent) thought federal government policies were working against their business, that percentage has jumped to almost half (48 per cent). This is an incredible rise but in my view it will rise further when the magnitude of the attack on small businesses operating in the building sector that was announced in the budget becomes understood (BUDGET 2011: Nine hits make a lethal combination, May 10).

The unpopularity of the government also reflects that small business and, to a lesser extent, medium business, is starting to really hurt as a result of the fall in consumer spending.

Our first Liddington-Cox graph today shows the big fall in the outlook as measured by the index – one of the largest falls in the history of the index.

What you see is that the number of small and medium sized-enterprises that are worried has jumped and the confidence level has declined, resulting in a fall in the net balance.

And that's not surprising given what we see on our second graph, where sales are falling but expectations in the next three months are falling further. Obviously, there are differences between industries but the trend is across most industries and most states.

But then there is the really bad news for our enterprises. Sales are falling, so only 19 per cent can lift prices. Around 71 per cent have simply held their prices, with 9 per cent falling. For the most part, so far, they have been able to hold their wages, with 60 per cent saying no change and 15 per cent lowering their wages bill.

But they have not cut their levels of employment, with three-quarters staying the same.

With sales down and falling, and wages and employment steady, small enterprises are taking the slump on the profit line – no wonder they are unhappy. What disturbs me is that if they keep this up it will affect the soundness of their businesses.

My guess is that in a few months, small and medium sized-business will start shedding labour and that's when the proverbial waste matter will hit the political fan. The current government may look at the current opinion polling as a high-water mark.