SME confidence rise muted as green shoots eclipsed by long-term economic concerns

Business confidence data released in the March 2024 quarter highlights several concerns SME owners have as they plan long-term. 

While short term business confidence has remained stable, and is currently at its highest since 2020, the longer-term trend is heading in the opposite direction. That’s according to the latest RFI New Zealand SME Banking Council survey, commissioned by Prospa NZ, which shows that SME confidence is on a downward trend for the next five-to-10 years.

Short-term business confidence for the next 12 months remains steady at 53 percent, but that confidence dipped when small businesses were asked about the next five years. Looking ahead to 10 years out, 51 percent of small businesses felt confident in May 2023 but only 45 percent do now.

As the cost of living and inflation remain heavy on many people’s minds, the same goes for small business owners who are having to adapt to the increasingly difficult challenge of doing business in the current economic environment.

With nearly half of all SMEs expecting a decrease in turnover in the next year, the research found the three main factors are weighing most heavily on the shoulders of business owners. These include: economic and regulatory factors, which jumped up 10 percent since May 2023; demand and cashflow (25 percent), also up 10 percent since May 23; and, staffing with 13 percent of small business owners saying it’s still a challenge, but indicate that labour shortages are easing.

More than two-thirds of businesses say supply chain costs (67 percent) and labour costs (63 percent) have been increasing, while the need for investment to generate cashflow affects 57 percent of businesses. Other stressors include cash rate increases (53 percent) and an expected decrease in turnover in the next 12 months (48 percent).

While businesses are showing early signs of recovery in recent years full of economic hurdles, small business owners remain cautious, indicating a minor blip in an otherwise downward trend.

Speaking to this decline in business confidence long-term, the latest BusinessNZ Planning Forecast expects the economy will be slow to show significant signs of improvement over the forecast period to March 2026.

BusinessNZ Director of Advocacy Catherine Beard says economic results remain a mixed bag in 2024.

“Improved results in business confidence can be partly attributed to the Government’s intention to reduce regulatory burden, including the recent introduction of a resource consenting fast-track.

“But other factors having a positive impact include sentiment that inflation has peaked, along with increased net migration numbers being at an all time high.

“Across many sectors, the reality is that businesses are still doing it tough with a range of factors impacting on investment, profitability and sales. New Zealand’s manufacturing sector remains in negative territory according to the latest BNZ – BusinessNZ Performance of Manufacturing Index.

“So while businesses are more positive about our economic future, the reality is that we’re not out of the woods yet.”

The overall BusinessNZ Economic Conditions Index (a measure of NZ’s major economic indicators) sits at four for the March 2024 quarter, an improvement of two on the previous quarter and an improvement of one on a year ago. The Index tracks 33 economic indicators including GDP, export volumes, commodity prices, inflation, debt, and business and consumer confidence.

Similarly, according to March 2024 data from MYOB’s Annual Business Monitor, SMEs’ expectations around New Zealand’s economic performance over the next 12 months are on the up, but longer term cost pressures continue to cause concern.

The figures from the nationwide survey of 1,000+ SME owners, directors and managers, show that despite ongoing cost pressures, 37 percent of SME owners and operators believe the local economy will improve over the coming year, while just over one-in-five (22 percent) expect it to remain the same and 40 percent believe it will decline.

MYOB General Manager – SME, Emma Fawcett, explains that while confidence has improved, several pressures continue to linger top of mind for local business owners.

“New Zealand’s SMEs are showing more optimism around the local economy looking ahead, but this year’s Business Monitor also shows that the cost-of-living, inflation and interest rates, followed by changes in consumer confidence or spending, and the cost of fuel and transport, are still top concerns impacting confidence,” explains Fawcett.

“Unfortunately, these concerns aren’t likely to fade in the short term as more mortgages are set to roll onto higher interest rates and inflation continues to take its time to drop. Some SMEs are also coming off the back of a particularly tough couple of quarters and many would have recognised a recession was underway long before the official figures were out.”

Overall, 82 percent of SMEs have seen their overhead costs increase in the past year, and on average, these costs are up $1490 per month. On top of this, for SMEs with 1-5 employees, compliance costs have increased an average of $1067 per year. This grows to an average of $2187 for businesses with 6-19 employees.

Unfortunately for consumers, as business owners seek to soften the blow to their bottom line, more than half (54 percent) of SMEs surveyed say they plan to increase their prices in the next 12 months.

In terms of where these price rises are likely to hit the most, a majority of SMEs in the construction and trades, manufacturing and wholesale, and retail and hospitality sectors, say they will raise their prices in the next year.

Looking ahead, incremental improvements for the next 12 months are slight. Overall, 29 percent of SMEs believe their revenue will rise over the coming year, however, 47 percent are forecasting it will stay the same and 21 percent are predicting a drop.

“Another year of hard slog for local business owners has largely tempered expectations for the year ahead, but the green shoots some SMEs have seen over the past 12 months is likely contributing to some of the optimism we’re seeing around their performance as they look forward,” explains Fawcett.

“Overall, businesses are keen to keep momentum going as confidence rounds a corner. While it’s not surprising that just over half of SMEs say that increasing revenue is their top goal for the year ahead, we can see that more than a quarter of local SMEs are also feeling more ambitious with the goal of growing their business, which is really encouraging.”

Prospa New Zealand Managing Director Adrienne Begbie says that businesses should seek professional advice to create strategies for longer-term resilience.

“These are indeed challenging times and businesses need to identify how they can reduce costs and maximise profits, as well as looking at what support may be available for them. We’ve seen it time and again – businesses that adapt to changing circumstances are the ones that thrive.”