Fast Lane: Why the sad face? Small business confidence at an all-time low

SMEs are not happy, according to the latest Westpac-Melbourne Institute Small Business Index, which shows a 12.7% fall in May to an all-time low of 108.2.

That’s down from 124.0 in February with two in five small businesses concerned about macroeconomic conditions weighing down on business performance.

The Westpac Index isn’t a lone voice out there, other recent surveys of business confidence such as the April NAB Monthly Business Survey and the Australian Chamber of Commerce and Industry’s January survey also record a subdued outlook. 

But despite what the surveys say, are small businesses actually lacking in confidence?

Research conducted several years ago by Ivan Roberts and John Simon for the Reserve Bank of Australia into business and consumer sentiment indices found lagged economic indicators such as changes in GDP, job vacancies and the cash

rate can explain a substantial proportion of the variation in a number of sentiment indices.

“When readily available economic information is appropriately ‘filtered’ from sentiment indices, these indices mostly fail even rudimentary Granger causality tests of predictive ability,” Roberts and Simon found.

According to the research, sentiment indicators like the Westpac Index can provide a rough summary of available economic information but it would be risky to claim much more on their behalf.

“While it is unclear whether the surveys actually measure that ephemeral concept ‘confidence’, it is clear that, with a couple of exceptions, whatever the surveys do measure does not have much predictive ability,” Roberts and Simon found.

“That is, confidence surveys don’t appear to tell us much that we didn’t already know.”

We know economic conditions are tough out there but the SMEs we speak to at SmartCompany are much more positive.

It’s also worth noting the gloomy Westpac Index was taken before the announcement of this year’s federal budget with its tax breaks and asset write-offs for small business.

Our own (very unscientific) polling shows 75% of SmartCompany readers surveyed are planning on spending cash to claim the $20,000 asset write-off.

That’s hardly the sign of businesses lacking in confidence.