Australian business activity slows in July with modest drop in new orders – Judo Bank

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Business activity across Australian small and medium-sized enterprises (SMEs) has recorded another marginal decline as the seasonally adjusted Judo Bank Australia SME Business Activity Index fell to 49.1 in July, down from 49.6 in June.

Data from the latest Judo Bank SME Business Activity Report revealed that lower new orders in both the manufacturing and service sectors fueled the most recent drop in overall output.

The latest statistics, which fell below the 50.0 neutral level for the second month in a row, indicated a prolonged drop in company activity in the SME sector. Nonetheless, the pace of decrease remained mild.

“The survey shows that just 26% of Australian SMEs experienced a decline in activity in July, which although a little higher than the long-run average of 22%, shows that most Australian SMEs are seeing stability in their market or are continuing to grow,” Warren Hogan, chief economic advisor at Judo Bank said.

Despite greater price increases, the report found that overall confidence among SMEs increased at the start of the second half of 2023.

Although manufacturing production increased at the start of the second half of 2023, the most recent decline in SME company activity was centred in the service sector, the report noted. This was due to a stabilising of manufacturing demand, which caused new orders to decline noticeably more slowly. 

Services new business, on the other hand, fell for the first time since March, but only marginally. Client demand has been reported to be influenced by rising interest rates and weakening economic circumstances. 

The inflation of input costs at SMEs, meanwhile, increased in July after declining for the previous three months. 

The most recent developments were caused by a resurgence of cost pressures within the service sector, which were supported by increasing labour and raw material costs. 

Additionally, the rate of increase in input costs among SMEs was higher than the national average for Australia.

Because of increasing cost pressures, SMEs increased their fees more quickly in July. Inflation of output prices increased sharply throughout the most recent survey period and rose back above the series average.

Finally, despite sluggish demand and rising expenses, SMEs’ business confidence rose in the second half of 2023. 

The Future Output Index increased to its highest level since January, owing to improved sentiment in both the manufacturing and service sectors.

Firms were generally optimistic that stronger economic conditions could potentially raise sales in the next year.

“Our assessment of the trends in the price indexes concludes that SME margins remain under pressure in 2023. SMEs are unable to pass on all the cost pressures they are experiencing which has been the case for much of the last 2 years,” Hogan noted. 

He concluded that strong market circumstances indicate that this margin compression is now manageable, but a more prolonged slump in the economy without a major easing of cost pressures might make certain enterprises questionable as to their sustainability.