Economy still revving, smaller firms say

                                                                                         

Conditions for small- to medium-sized businesses strengthened in the final three months of last year, boosted by the same factors that led to yesterday's interest rate hike.

A National Australia Bank Ltd (NAB) survey shows overall conditions for small to medium enterprises (SMEs) strengthened in the December quarter, up five points to 27 index points compared to the previous quarter.

The survey of 650 firms with at least 35 employees and turnover of between $2 million and $10 million, shows 41 per cent of SMEs reported good or very good conditions during the quarter.

This compared with 14 per cent of SMEs that reported poor or very poor conditions.

SMEs in the business services sector and the health sector reported the strongest conditions, followed by those in wholesaling.

Conditions for finance and insurance businesses remained above average but were weaker than previous quarters.

The worst conditions were recorded by SMEs in hospitality, food and beverage manufacture, petroleum and chemical manufacture and some parts of retail.

NAB acting executive general manager of business and private banking Joseph Healy said strong customer confidence was the driving force behind the favourable conditions.

``The good trading conditions for SMEs in the final quarter of last year were driven almost exclusively by high levels of customer confidence and demand, with some positive input from better seasonal conditions and company specific factors,'' he said.

But those same factors that boosted conditions for small businesses could also come back to hurt them.

Rampant consumer demand evident in the Australian economy is one of the chief reasons behind yesterday's decision by the Reserve Bank of Australia (RBA) to raise interest rates.

By raising rates, the RBA hopes to cool spending in an effort to head off rising inflation. For businesses, this means reduced profits.

While SME profit growth was strong in the December quarter, with the survey's profit index up nine points to 31, the forecast for the next 12 months, although favourable, has been revised downwards.

Mr Healy said the forecasts were good but that small businesses were concerned about potential constraints on future profits.

``SMEs continue to be concerned about potential lack of demand, labour availability ... and higher wages and interest rates,'' he said.

Source - http://business.smh.com.au/economy-still-revving-smaller-firms-say/20080206-1qk4.html

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