Quarterly SME Survey

September quarter 2012

SME confidence & conditions better in Q3 but still below average; sentiment of SMEs now in line with their larger counterparts but activity, capacity utilisation and new orders continue to under perform. Strength in recreation & personal services and transport a consistent theme across SMEs and larger firms.
! SMEs business confidence rebounded in the September quarter, though remained below-average levels. The overall level of SME confidence was consistent with levels reported by larger businesses in the NAB Quarterly Business Survey this is the first time in two years that smaller firms have been as confident as larger firms. Part of the improvement in sentiment may reflect expectations for further interest rate cuts (survey taken prior to RBA lowering the cash rate by 25 bps at its meeting in October), while announcements of additional policy stimulus by major central banks (US, Europe and Japan) may have helped. SME business conditions also strengthened in the September quarter, following a very weak outcome in the previous quarter, though smaller firms continued to under perform their larger counterparts. The subdued activity outcome largely reflected weakness in profitability, while SME trading and employment conditions held up a little better. That said, capacity utilisation of SMEs remains at low levels for this survey (2006). Responses to a special question suggest that a majority of SMEs developed or improved their websites and launched new products over the past 12 months in an attempt to strengthen their competitiveness in the market. By industry, confidence improved notably in wholesale, while it also strengthened considerably in property, business and finance services. Sentiment remained surprisingly subdued in health services, possibly reflecting concerns about potential cut backs to public sector spending, while optimism was very strong in property services, where lower borrowing rates may be expected to stimulate housing demand in coming months. Confidence was strongest in WA, while it a little softer and broadly similar across the other mainland states. Conditions in manufacturing, property services and transport improved notably in the September quarter, while accommodation, cafes and restaurants was the only industry to report a (slight) deterioration in activity. SME conditions were strongest in health services, while they were weakest in wholesale, retail and construction with these industries also under performing their larger counterparts. Conditions picked up considerably in all states, with the exception of Queensland, where they deteriorated modestly. Confidence of SMEs improved across all firm sizes, with the most marked improvement recorded for mid-tier firms ($3-5m p.a.). Confidence remained weakest for high-tier firms ($5-10m p.a.), while it was equally as soft for low-tier ($2-3m p.a.) and mid-tier firms. Conditions also strengthened across all firm sizes of SMEs; low-tier firms continued to report very difficult conditions, while activity of mid-tier and high-tier firms was a little less subdued.

Key quarterly business statistics**

2011q3 SME business confidence Low Mid High SME business conditions Low Mid High SME cash flows (n.s.a.) Low Mid High -5 -7 -2 -4 -4 -5 -5 -3 -5 -10 -7 -1 2012q2 2012q3 Net balance 2011q3 SME trading conditions Low Mid High SME profitability Low Mid High SME employment Low Mid High -1 -3 -2 2 -7 -9 -7 -6 -4 -4 -4 -4 2012q2 2012q3 Net balance

-11 -7 -11 -12 -8 -13 -6 -8 -13 -20 -9 -13

-3 -2 -2 -5 -5 -8 -4 -3 -3 -6 -7 2

-4 -10 -4 -2 -13 -16 -12 -12 -9 -14 -3 -11

-3 -7 -3 0 -8 -10 -8 -7 -3 -4 -3 -1

Low: $2-3m p.a. Mid: $3-5m p.a. High: $5-10m p.a.

** Data are seasonally adjusted by NAB, except SME cash flow (insufficient time series available). All data are net balance indexes. Fieldwork for this Survey was conducted from 21 Aug to 12 Sep covering over 700 SME firms across the non-farm business sector.

For more information contact: Alan Oster, Chief Economist (03) 8634 2927 0414 444 652

Next release: 13 November 2012 (October Monthly)

Analysis
Confidence rebounds and in line with larger firms
Business confidence (net bal., s.a.), SME & quarterly
30 20 10 0 -10 -20 -30 -40 2006 2007 2008 2009 2010 2011 2012

Conditions also improves but remain subdued

Business conditions (net bal., s.a.), SME & quarterly
30 20 10 0 -10 -20 -30 -40 2006 2007 2008 2009 2010 2011 2012

SME Confidence

Quarterly Confidence

SME Conditions

Quarterly Conditions

SME business confidence recovered somewhat in the September quarter up 8 to -3 points after the index fell to its lowest level in more than three years in the previous quarter. While SMEs have tended to be less optimistic than their larger counterparts, as reported in the NAB Quarterly Business Survey, confidence of SMEs recovered more strongly in the latest survey, with sentiment now broadly similar across both smaller and larger firms. Part of this recovery may reflect an expectation for further lowering of borrowing costs (the SME survey was conducted prior to the RBA lowering the cash rate by 25 bp at its meeting in October), a less severe impact of carbon pricing on activity than initially anticipated, while announcements of additional policy stimulus by major central banks (US, Europe and Japan) may have helped to reassure firms about the stability of the global economy. Nonetheless, overall confidence remains below the series average of +2 points, with underlying sentiment likely to be weighed down by soft labour market conditions and general consumer caution. The pick up in confidence was broad-based across all firm sizes, and was particularly apparent for mid-tier and high-tier firms. SME business conditions also improved solidly in the September quarter, though at -5 index points, remained well-below the series average (of +5 points since mid-2006). SME conditions were also reasonably subdued relative to conditions of their larger counterparts.

SMEs very weak in wholesale & retail; strong in health

Business Conditions
Net. bal

September quarter 2012; seasonally adjusted Larger firms

Net. bal

10

10

-10 SME firms -20

ho le sa le Re C on ta il st r M an ucti on uf ac tu ri n g Pr op er B u ty si ne ss Tr an sp or t R ec Fin . & an ce Ac pe rs co on m a m od l at io n He al th

-10

-20

A comparison of industry conditions for SMEs and larger sized firms (taken from NABs Quarterly Business Survey) suggests that SMEs generally under performed larger firms in the September quarter. The clear exceptions to this were business and finance services this possibly reflects larger firms in these industries having a greater exposure to overseas weakness. Smaller manufacturing firms also held up a little better than their larger counterparts, with SMEs in this industry perhaps less exposed to external trade and therefore the impact of the high AUD. A consistent theme across all firm sizes was the relative strength in recreation & personal services and finance services, and relative weakness in construction.

Analysis (cont.)
Profits & employment up solidly
SME business conditions components (net bal., s.a.)
50 40 30 20 10 0 -10 -20 -30 -40 2006 2007 Trading 2008 2009 Profitability 2010 2011 2012

Cash flows rebound but still poor

SME business conditions & cash flow (net bal.)
30

20

10

-10

-20 2006 2007 2008 2009 2010 2011 2012

Employment

Conditions (s.a.)

Cash flow (n.s.a.)

SME conditions improved somewhat in the September quarter, reflecting a notable pick up in profitability and employment conditions, as well as a slight improvement in trading conditions. SME cash flows (n.s.a) also strengthened considerably, more than unwinding a heavy fall in the previous quarter.

Capacity pressures still low

Capacity utilisation (per cent, s.a.), SME & quarterly
85 84 83 82 81 80 79

Orders fall further and very poor

Forward orders (net bal., s.a.), SME & quarterly
20

10

-10

-20
78 77 2006 2007 2008 2009 2010 2011 2012

-30 2006 2007 2008 SME Orders 2009 2010 2011 2012

SME Cap Util

Quarterly Cap Util

Quarterly Orders

Capacity utilisation was unchanged at 78.0% in the September quarter the lowest outcome in the history of the survey (since mid 2006), and well below the level of utilised capacity of larger firms (80.7%). Capacity utilisation of mid-tier firms fell notably in the quarter, while it picked up modestly for large-tier firms and was unchanged for low-tier firms. The level of capacity utilisation was broadly similar across SMEs, ranging from 77.5% for low-tier firms to 77.9% for high-tier firms. Forward orders of SMEs deteriorated heavily for a second consecutive quarter and were very poor, particularly when compared to orders of their larger counterparts.

Analysis (cont.)
Stocks levels no longer declining
Stocks (net bal., s.a.), SME & quarterly
30
30

SME investment softens

Capital expenditure (net bal., s.a.), SME & quarterly

20

20

10

10

-10

-10

-20 2006 2007 2008 SME Stocks 2009 2010 2011 2012

-20 2006 2007 2008 SME Capex 2009 2010 2011 2012

Quarterly Stocks

Quarterly Capex

The SME stocks index edged higher in the September quarter, consistent with a rise for larger firms. Nonetheless, there remains a sizable gap between the level of stocks for larger and smaller firms, which may reflect better trading conditions of larger firms over recent quarters prompting them to increase stocks in anticipation of relatively stronger demand. Capital expenditure deteriorated in the September quarter, inconsistent with the pick up in capex of larger firms. While capex of SME firms remains below the level reported by larger firms, the overall gap has narrowed since a year ago, perhaps reflecting some reduction in mining investment (not captured by the SME survey) in response to the weaker global outlook.

Websites improved and new products launched by a majority of firms to try to boost competitiveness
Strategies employed over past 12 months to improve competitiveness
Proportion of firms* % %

50

50

25

25

0
m ar ke tin R ed g uc ed pr ic O in ffl g in e m ar ke tin g N on e lo ca tio n pr od uc t R& D ur ce n eb si te lo ca tio ut so W O th er

Ne w

Ne w

nl in e

* Multiple responses allowed; will not sum to 100% Source: NAB Quarterly SME Survey

In the September Quarter SME Survey, we asked firms whether they had employed any new strategies over the past 12 months in an attempt to improve competitiveness in the market. The results show that more than half of all respondents developed or improved their websites and launched new products to try to strengthen their position among their competitors (see Graph). It is also evident that a larger share of firms employed online marketing strategies than offline advertising strategies a possible sign that internet marketing may be becoming more mainstream than more traditional forms of advertising. Only a relatively small proportion of respondents either moved or opened new locations to try to improved competitiveness.

ov e

Analysis (cont.)
Sales still the most constraining factor on output
Constraints on current output (% of firms)
70 60 50 40 30 20 10 2006 2007 2008 2009 2010 2011 2012 70 60 50 40 30 20 10 2006 2007 2008 2009 2010 2011 2012

Sales & orders

Labour

Premises & plant

Materials

Sales & orders remain the most constraining factor on the output of SMEs in the September quarter consistent with very weak forward orders. SMEs reported a slight pick up in the significance of availability of suitable labour as a constraining factor on output, but it remains relatively low by historical standards (especially relative to pre-GFC levels). The importance of premises & plant and materials as constraints fell slightly and remained low, which was broadly similar to those of larger firms.

Profitability constrained by a lack of demand; interest rates and lack of capacity not all that concerning
Main constraint on profitability in next 12 months (% of firms)
60 50 40 30 20 10 0 2006 2007 2008 2009 2010 2011 Demand 2012 60 50 40 30 20 10 0 2006 2007 2008 2009 2010 2011 2012

Inadequate capital capacity All other

Interest rates Wage costs

Availability of suitable labour

In the September quarter, lack of demand remained the most significant constraint on SMEs future profitability (over the next 12 months); while there has been a gradual increase in the proportion of firms reporting demand as a significant constraint over the past three years, far fewer firms reported it as significant compared to during the post-GFC period. Consistent with a string of RBA rate cuts over the past year as well as the expectation that monetary policy will remain accommodative for some time to come, interest rates have become increasingly less constraining and are currently of little concern for SMEs. Within all other constraints, taxation & government became slightly less of a concern for SMEs perhaps suggesting that the impact of the carbon tax on SMEs was not as bad as initially feared.

Analysis (cont.)
Demand continues to be the key driver of trading performance
Main reason for improvement in trading performance (net balance)
70 60 50 40 30 20 10 0 06 07 08 09 10 11 12
70 60 50 40 30 20 10 0 06 07 08 09 10 11 12

70 60 50 40 30 20 10 0 06 07 08 09 10 11 12

Demand Finance

Competition

Int. rates Ex. rates

Wage & jobs growth

Fuel Other

Tax & govt. policy

Consumer demand remained the most influential driver of improved trading performance in the September quarter, with the proportion of firms nominating this constraint little changed from the June quarter. Other reasons as a contributing factor to improved trading increased in significance in the quarter and remained significant overall; the significance of this factor largely reflected seasonal and company specific factors. Tax & government policy appeared to have provided less support to trading performance in the September quarter, which may reflect some unwinding of government carbon tax compensation payments provided by the government through May and June.

SMEs constrained by a lack of demand and government policies & taxes

Most significant constraining factors for SMEs (per cent, multiple response)
50

50

50

40

40

40

30

30

30

20

20

20

10

10

10

0 III IV I II III IV I II 2012 Cash Flow III 2010 2011

0 III IV I II III IV I II 2012 Interest rates III 2010 2011 Credit Staffing

0 III IV I II III IV I II 2012 Other III 2010 2011 Tax & govt. policy

Demand Global eco uncertainty

Demand became the most significant constraining factor on the ability of a majority of SMEs to make longer term decisions, though it was slightly less constraining than in the previous quarter, which is consistent with a slight improvement in trading conditions. Tax & government policy also declined in importance as a constraining factor, which may reflect some relief about the implications of the impacts of carbon tax not being as significant as initially feared. SMEs do not appear to have been very constrained by interest rates or the availability of credit, which continued to trend lower.

Industry and State analysis

Property most confident; health & manufacturing pessimistic
Business confidence (net balance, s.a.)
40 30 20 10 0 -10 -20 -30 -40 06 07 08 Manuf Retail 09 10 11 12 40 30 20 10 0 -10 -20 -30 -40 06 07 08 09 10 11 12
40 30 20 10 0 -10 -20 -30 -40 06 07 08 09 10 11 12

Constn

Wsale Finance

Transp

Business Accom, cafes & rest

Property Health

Business confidence improved across all industries in the September quarter, with the exception of transport & utilities, where it was marginally lower. The most significant improvement in confidence was in wholesale (up 15 to -6 points), finance services (up 14) and property services (up 13). Confidence was strongest in property services (+15) followed by finance services (+4) and accommodation, cafes & restaurants (+3), while it was weakest in health services (-12) possibly reflecting some anticipation of a pull back in government funding for this industry and manufacturing (-10).

Business confidence strengthens across all mainland states; WA most upbeat

Business confidence (net balance, s.a.)
40 30 20 10 0 -10 -20 -30 06 07 08 09 10 11 NSW 12 40 30 20 10 0 -10 -20 -30 06 07 08 09 10 VIC 11 12 QLD 40 30 20 10 0 -10 -20 -30 06 07 08 09 10 SA 11 12 WA

Australia

Australia

Australia

Business confidence improved across all mainland states in the September quarter, after falling across all states in the June quarter. The most significant improvements occurred in SA (up 13 to -3 points), Victoria (up 12) and NSW (up 11), while Queensland and WA reported only marginal improvements. The overall level of SME confidence was broadly similar across most states confidence was -3 in NSW, Queensland and SA, and -2 in Victoria while it was a little stronger in WA (+2).

Industry and State analysis (cont.)

Conditions strongest in health, finance and transport; weakest in wholesale, retail and construction
Business conditions (net balance, s.a.)
40 40
40

20

20

20

-20

-20

-20

-40 06 07 08 Manuf Retail 09 10 11 12

-40 06 07 08 09 10 11 12

-40 06 07 08 09 10 11 12

Constn

Wsale Finance

Transp

Business Accom, cafes & rest

Property Health

Business conditions improved across most industries in the September quarter, with the exception of accommodation, cafes & restaurants, where they weakened marginally, and business services, where they were unchanged. The biggest pick up in activity in the quarter was in manufacturing (up 15 to -4 points), property services (up 14) and transport (up 12). There are some signs that the property market may be beginning to strengthen on the back of lower borrowing rates, which may have benefited the property sector in the September quarter, while transporters may have benefited indirectly from the governments compensation payments to households in May and June. The strongest performing industries in the quarter were health services (+16), followed by finance (+9) and transport (+7), while conditions were weakest in wholesale (-16), retail (-14) and construction (-12).

Conditions fairly subdued across states but performing well in WA

Business conditions (net balance, s.a.)
40 30 20 10 0 -10 -20 06 07 08 09 10 11 NSW 12 40 30 20 10 0 -10 -20 06 07 08 09 10 VIC 11 12 QLD 40 30 20 10 0 -10 -20 06 07 08 09 10 SA 11 12 WA

Australia

Australia

Australia

Business conditions improved across all states in the September quarter, though remained well down on levels reported in late 2009. The most notable improvements in the quarter were in SA (up 12 to -2 points) and WA (up 10). Business conditions in WA have tended to outperform the other states over 2012, suggesting that the strength in the mining sector may be provided flow on benefits to SMEs in the region. In levels terms, conditions of SMEs in WA (9) were strongest, while conditions were weakest in NSW (-8) and Queensland (-6).

Industry and State analysis (cont.)

Cash flows strongest in health; very weak in manufacturing
Cash flow (net balance, n.s.a.)
40 40
40

20

20

20

-20

-20

-20

-40 IV I II III IV I 2010 Manuf Retail II III IV I 2011 II III 2012 Constn

-40 IV I II III IV I 2010 Wsale Finance II III IV I 2011 II III 2012 Transp

-40 IV I II III IV I 2010 II III IV I 2011 II III 2012 Property Health

Business Accom, cafes & rest

Cash flows (not seasonally adjusted) improved significantly in health services more than unwinding a heavy fall in the previous quarter while they were also up solidly in property services and accommodation, cafes & restaurants. In contrast, cash flows deteriorated in manufacturing, where they are now weakest, and transport. Cash flows were also quite poor in construction, retail and wholesale, while they were strongest in health services, accommodation, cafes & restaurants and finance services.

Cash flows improve in all states; strongest in WA

Cash flow (net balance, n.s.a.)
40 30 20 10 0 -10 -20 -30 IV I II III IV I 2010 II III IV I 2011 NSW II III 2012 40 30 20 10 0 -10 -20 -30 IV I II III IV I 2010 Australia II III IV I 2011 VIC II III 2012 QLD 40 30 20 10 0 -10 -20 -30 IV I II III IV I 2010 Australia II III IV I 2011 SA II III 2012 WA

Australia

Cash flows improved across all states in the quarter, after falling across all states in the previous quarter, with the most marked increases occurring in WA and Queensland, where the cash flows index was highest (and positive). In contrast, the cash flows index was lowest in NSW and SA.

Firm size analysis

Confidence and conditions pick up solidly, albeit from a low base
Business confidence (net bal., s.a.)
30 20 10 0 -10 -20 -30 2006 2007 2008 Low 2009 Mid 2010 2011 High 2012 30 20 10 0 -10 -20 -30 2006 2007 2008 Low 2009 Mid 2010 2011 High 2012

Business conditions (net bal., s.a.)

In the September quarter, business confidence improved solidly for mid-tier firms ($3-5m p.a.) and high-tier firms ($5-10m p.a.), while it was modestly better for low-tier firms ($2-3m p.a.). Consistent with the broad-based improvement in sentiment in the quarter, business conditions also strengthened across all SMEs. In levels terms, conditions were weakest for low-tier firms despite being the most confident SMEs while conditions of mid-tier and high-tier firms were strongest and broadly similar. The overall pick up in SME conditions fundamentally reflected improvements in profitability and especially employment conditions.

Trading conditions & profitability strengthen across SMEs

Trading conditions (net bal., s.a.)
50 40 30 20 10 0 -10 -20 2006 2007 2008 Low 2009 Mid 2010 2011 High 2012 50 40 30 20 10 0 -10 -20 2006 2007 2008 Low 2009 Mid 2010 2011 High 2012

Profitability (net bal., s.a.)

All firm sizes experienced a modest strengthening in trading conditions in the September quarter, though the individual increases were not sufficient to offset falls in the previous quarter. In levels terms, conditions remained weakest for low-tier firms, while they were again least subdued for high-tier firms. Profitability improved modestly across all firm sizes in the quarter, and remain at broadly similar levels. More importantly, profitability of SMEs (all levels) was only marginally above GFC levels.

10

Firm size analysis (cont.)

Employment conditions and cash flows rebound for low-tier and high-tier firms, more than unwinding heavy falls in the previous quarter
Employment (net bal., s.a.)
20 15 10 5 0 -5 -10 -15 -20 2006 2007 2008 Low 2009 Mid 2010 2011 High 2012

Cash flow (net bal.)

20 15 10 5 0 -5 -10 -15 -20 IV 2009 I II III IV I II III IV I II 2012 High III 2010 Low 2011 Mid

Employment conditions rebounded for low-tier and high-tier SMEs, after falling heavily in the June quarter, while they were little changed for mid-tier firms. In levels terms, employment conditions were weakest for low-tier firms, and strongest for high-tier firms. Cash flows improved from worryingly low levels for low-tier and high-tier firms, after deteriorating heavily in the previous quarter. In levels terms, cash flows were strongest (and positive) for high-tier firms, while they were weakest for mid-tier and low-tier firms.

Capacity utilisation falls heavily for mid-tier firms and relatively low across all SME sizes; forward orders very weak for high-tier SMEs
Capacity utilisation (per cent, s.a.)
85 84 83 82 81 80 79 78 77 76 2006 2007 2008 Low 2009 Mid 2010 2011 High 2012
-30 2006 2007 2008 Low 2009 Mid 2010 2011 High 2012 -20 0 10 20

Forward orders (net bal., s.a.)

-10

Capacity utilisation fell sharply for mid-tier firms, bringing it more into line with utilised capacity of other SMEs. Utilised capacity picked up a touch for mid-tier firms, while it was little changed at a low level for low-tier firms. Forward orders deteriorated heavily for high-tier firms, where they were weakest, while they were a little weaker for mid-tier firms. In contrast, forward orders improved moderately for low-tier firms albeit after sharp falls last quarter. High-tier firms and now reporting the lowest forward orders.

11

Macroeconomic, Industry & Markets Research

Australia Alan Oster Jacqui Brand Rob Brooker Alexandra Knight Michael Creed Dean Pearson Gerard Burg Robert De Iure Brien McDonald Tom Taylor John Sharma Tony Kelly James Glenn Group Chief Economist Personal Assistant Head of Australian Economics & Commodities Economist Australia Economist Agribusiness Head of Industry Analysis Economist Industry Analysis Economist Property Economist Industry Analysis & Risk Metrics Head of International Economics Economist Sovereign Risk Economist International Economist Asia +(61 3) 8634 2927 +(61 3) 8634 2181 +(61 3) 8634 1663 +(61 3) 9208 8035 +(61 3) 8634 3470 +(61 3) 8634 2331 +(61 3) 8634 2788 +(61 3) 8634 4611 +(61 3) 8634 3837 +(61 3) 8634 1883 +(61 3) 8634 4514 +(61 3) 9208 5049 +(61 3) 9208 8129

Global Markets Research - Wholesale Banking Peter Jolly Head of Markets Research Robert Henderson Chief Economist Markets - Australia Spiros Papadopoulos Senior Economist Markets David de Garis Senior Economist Markets New Zealand Tony Alexander Stephen Toplis Craig Ebert Doug Steel London Nick Parsons Tom Vosa Gavin Friend Chief Economist BNZ Head of Research, NZ Senior Economist, NZ Markets Economist, NZ Head of Research, UK/Europe & Global Head of FX Strategy Head of Market Economics UK/Europe Markets Strategist UK/Europe Foreign Exchange +800 9295 1100 +800 842 3301 +800 64 642 222 +800 747 4615 +1 800 125 602 +(65) 338 0019

+(61 2) 9237 1406 +(61 2) 9237 1836 +(61 3) 8641 0978 +(61 3) 8641 3045 +(64 4)474 6744 +(64 4) 474 6905 +(64 4) 474 6799 +(64 4) 474 6923 +(44 20) 7710 2993 +(44 20) 7710 1573 +(44 20) 7710 2155 Fixed Interest/Derivatives +(61 2) 9295 1166 +(61 3) 9277 3321 +800 64 644 464 +(44 20) 7796 4761 +1877 377 5480 +(65) 338 1789

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