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Is Australia’s small business sector on the brink?

While last week’s Federal Budget announced much needed support for Australia’s SME sector, Employment Hero’s latest SME Index, which draws from an expansive dataset of over 1.5 million employees and 150,000 small and medium enterprises (SMEs), reveals SME growth is on a downwards slope with the Year-on-Year (YoY) employee growth rate almost halved from 11 per cent in April 2023 to just 6 per cent in April 2024.

This comes as SME insolvencies are reported at an all time high1, and big name retail and hospitality businesses shut up shop, with an estimated 5000 restaurants predicted to go under in the next 12 months2.

This slowdown is particularly evident in Victoria, where SMEs experienced the weakest growth at 5.6 per cent YoY, underscoring ongoing business difficulties in the state. In contrast, South Australia and Western Australia lead with YoY growth rates of 8.4 per cent and 8.2 per cent, respectively, showcasing regional disparities in business climates.

Key Findings from SME Index Show:

  • Dramatic Slowdown in SME Growth: YoY employee growth rate has dropped significantly, indicating a worrying trend that could threaten the very existence of SMEs if not addressed.

  • Regional Disparities: Victoria’s SMEs show the slowest growth at 5.6% YoY, highlighting regional challenges, while South Australia and Western Australia lead with 8.4% and 8.2% YoY growth, respectively.

  • Industry Challenges: Retail, Hospitality, and Tourism sectors show minimal growth, whereas Healthcare & Community Services remain resilient with a 9.1% YoY increase.

  • Wage Inflation: Wages are up 7.8% YoY with a sharp 2.2% monthly increase in April 2024, reflecting severe inflationary pressures.

  • Work Hours Volatility: While median monthly hours worked are up 3.9% since February, there’s an annual decrease of 1.2%, indicating potential inefficiencies.

  • Regional Disparities: Victoria’s SMEs show the slowest growth at 5.6% YoY, highlighting regional challenges, while South Australia and Western Australia lead with 8.4% and 8.2% YoY growth, respectively. * See the below graph if you’re keen on any YoY growth data for different regions.

Industry Performance

The Index also revealed certain industries face more significant challenges. Retail, Hospitality and Tourism sectors show modest growth, increasing by 5.4 per cent YoY, with a marginal 0.5 per cent MoM rise. Construction and Trade Services mirror this trend, with 5.2 per cent YoY growth and a 0.4 per cent MoM increase. In stark contrast, the Healthcare and Community Services sector outperforms significantly, with a 9.1 per cent YoY and a 0.6  per cent MoM increase. These trends highlight sector-specific challenges and opportunities, particularly the resilience of the healthcare sector amidst broader economic uncertainties.

Accelerating Wage Inflation

The Index revealed that wage growth is accelerating at an unsustainable rate, with YoY wages up by 7.8 per cent and a sharp MoM increase of 2.2 per cent in April 2024, more than doubling the 0.9 per cent growth seen in March 2024. This surge in wages reflects ongoing inflationary pressures that could impact the profitability and sustainability of SMEs.

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The median hourly rate now stands at $39.21, up by 2.2 per cent from $38.34, further emphasising the cost pressures businesses face in retaining talent. The disparity between wage growth and slowing employee growth raises concerns about the long-term sustainability of current wage levels.

Ben Thompson, CEO and Co-Founder of Employment Hero, said: “These trends signal a very real threat to the future of the SME sector. If the growth rate continues to decline while wages and operational costs rise, we could see a significant number of SMEs struggle to survive. This would have profound implications not only for the businesses themselves but for the broader economy, as SMEs are vital for job creation and innovation. It’s imperative that we address these issues head-on to ensure the sector remains robust and capable of driving economic growth.”

Work Hours a Complex Scenario

Median hours worked saw a monthly increase of 3.9 per cent, yet they are still down 1.2 per cent YoY. This annual decrease, despite the monthly rise, suggests a certain degree of seasonality. However, the combination of rising wages and fluctuating work hours poses additional challenges for SMEs striving to maintain productivity and profitability in a volatile economic environment.

Eddie Kowalski, Senior Insights Manager at Employment Hero, said: “This data points to a very challenging scenario for SMEs. Wage growth, which has surged by 7.8 per cent year-on-year and 2.2 per cent month-on-month, is a blessing and a curse. While higher wages can attract and retain talent, they also increase operational costs, which can compromise the viability of small businesses in the long run. This is why it’s important for decision makers to look at ways of supporting the SME sector which is facing severe and ongoing challenges. “

Mr Thompson added: “Our latest SME Index reveals the sector is at a crossroads. While growth exists month on month, the overall trend is downwards. I fear things may worsen before they improve. Accelerating wage growth and fluctuating work hours point to underlying economic tensions that need to be addressed”

“While last week’s Federal Budget provided some much needed support for SMEs, it’s simply not enough to prevent what very well may be the most serious threat to small business creation in some time. Our policymakers and business leaders need to navigate these complexities and implement better support initiatives to sustain the sector’s vitality and ensure balanced economic growth. The coming months will be critical in determining whether certain SMEs can adapt to these challenges or closure altogether.”

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