Australian businesses are showing resilience in the face of a slowing economy, managing to offset declining turnover by reducing their costs, according to Westpac Business Bank’s latest quarterly snapshot.
The report, which draws on the Group’s proprietary data from commercial and SME customers, showed that while turnover fell by 3 per cent in the December quarter, expenses dropped by 4 per cent to their lowest level since the March quarter of 2022. As a result, business cash flow stabilised over the second half of 2023.
“Businesses are cautiously optimistic,” the report said. “They expect that the worst is behind them when it comes to cost pressures and that turnover will stabilise before growing as they move further into 2024.
Hotels, cafes and restaurants saw the biggest decline in expenses – by 9 per cent on average – in the December quarter. Some of that was driven by lower input costs. For example, there have been outright declines in the price of meat, seafood, fruit, and vegetables recently, which is helping to boost the cash flow of some businesses.
Labour costs have also eased. Businesses are requiring fewer hours from their employees as consumer demand slows. At the same time, an easing in labour market conditions is helping to ease wage pressures.
This progress on costs and inflationary pressures has only partly been offset by softening demand. Revenue fell across almost all industries, the report showed, although strong population growth is supporting sectors which provide essential services such as healthcare and education.
Businesses continue to benefit from having stockpiled cash and paid down debt during the pandemic. That has helped to cushion the impact of higher interest rates pushing up debt servicing costs.
“Due to the large amount of debt previously repaid, and the liquidity buffers built up, total debt servicing costs for Australian SMEs remain below their pre-pandemic levels in aggregate,” the report said.
Those buffers will give businesses a safety net in the event of any unforeseen shocks in the year ahead, as well as giving them scope to invest in new technologies such as artificial intelligence and clean energy solutions to help improve the efficiency and sustainability of their operations.
Still, there is some divergence in the outlook between small businesses and the bigger end of town. SMEs are typically more sensitive to the economic cycle than large commercial businesses, and that is reflected in a differing approach to tackling future challenges.
A recent survey of business leaders commissioned by Westpac showed that around half of small businesses planned to maintain the status quo in their operations over the next 12 months. In contrast, 92 per cent of businesses with more than 20 employees were looking for opportunities to invest for growth.
“This ambition to grow and invest has been evident among Westpac’s commercial business customers in recent quarters, manifesting as an increase in both long-term borrowing and equipment financing,” the report said.
Almost 60 per cent of the business leaders surveyed said they were optimistic about the year ahead.
Cash flow will continue to be supported by a moderation in inflation, with income flows also likely to remain soft over the first half of the year. However, consumer spending is expected to make a sustained recovery when household finances improve in the second half of the year. Tax cuts which come into effect from July 1 and the possibility of rate cuts later in the year should give the consumer a boost.
“Australian businesses continue to face several challenges as the economy slows, however our customers are well positioned coming into 2024,” said Anthony Miller, Westpac Chief Executive, Business and Wealth.
“The resilience of Australian businesses and their ability to adapt through various setbacks over the last few years is impressive.”