Economic Insider - Small Business: 2015 A Year in Review

Economy & Finance

08 January 2016

2015 was a year of change for the Australian economy, with many macro factors impacting the small and micro business sectors. Summarised below are four key movements in the economy, as well as the challenges and opportunities presented for various industries as a result.

  1. The Federal Budget
    The highlight of 2015 for small business was the Federal Budget’s generous depreciation incentives for businesses with a turnover up to $2 million. In sharp contrast to the harsh 2015 budget, the focus on economic growth as a way to rein in the budget deficit was on the whole welcomed by small business.
  2. The Resources Sector
    Despite the positive impact of the Federal Budget changes, ultimately the small business sector survives, thrives or dives on the demand for its goods and services. Small businesses that rely heavily on the resources sector rode the wave of the once-in-a-multi-generational commodity price boom. Now that the party is over, many are feeling the pinch from the fierce cost cutting of the big mining companies.
  3. Population Growth
    The impact of the end of the resources boom is more pronounced in WA than in other states as commodity prices fall sharply and drag population growth down with them. WA’s population growth peaked at 3.7 per cent in the year to September 2012, but has since slowed to just 1.3 per cent, and is more likely to slow further than re-accelerate.

    Population growth has slowed in all states, but not as sharply as in WA, so demographic trends remain on the whole favourable in NSW and Victoria. Queensland is somewhere between WA and the big two.
  4. The Aussie Dollar
    The Australian dollar continued its steady depreciation in 2015. At around 70 cents it is much more competitive than when it was above parity with the US dollar all through 2011 and 2012. As it has done so many times since it was floated more than 30 years ago, the currency is facilitating the transition of the Australian economy from the resources boom to business and household services, including those provided by small business.

The impacts and opportunities that the above factors present take shape in a variety of ways and are felt differently depending on the industry that businesses operate in.

Exporters

The resources boom to some extent ‘crowded out’ those parts of the economy that did not feed off it, including exporters of goods and services whose prices were not booming. Now that the Australian dollar’s ‘stronger for longer’ era has given way to a sustained period of depreciation, exporters are enjoying a welcome relief from the uncompetitive currency they had to grapple with when the resources boom was at its peak.

Tourism, Rural and Education

The tourism, rural and education sectors are also liking the lower Australian dollar and are filling some, although not all, of the void left by the end of the construction phase of the resources boom.

That void is deeper in WA than in other states, but the western state’s economy has a lot more to show for the recent mining boom than it was left with when the late 1980s entrepreneurial boom collapsed under the weight of very high interest rates more than a quarter of a century ago.

The outlook for small business in NSW and VIC is more positive than in WA, while QLD’s tourism industry will be boosted markedly by the lower Australian dollar, not only as overseas holidays become more expensive for Australians, but as Australia becomes much cheaper for foreign visitors.

Construction

The dwelling construction cycle has been a key driver of growth in all states’ economies in the last two to three years. It is already turning down in WA but still has some way to run in NSW and VIC. It has filled some of the void of activity for trade services such as electrical, plumbing and general building services, although more specialised trades that cannot be re-directed from the mining/oil and gas industries to dwelling construction have been hit hard by the resources downturn.

Farming

The WA economy is likely to underperform NSW and VIC for a while longer because it is very unlikely a new wave of mining/energy projects will emerge in the foreseeable future. However, the grain growing region in the southern half of WA is on the verge of a third consecutive good harvest. When coupled with the benefits of a lower Australian dollar, a buoyant rural sector has more than played its part in offsetting the mining slump because the flow through to small business is much greater than, for example, it is for mega LNG projects.

Retail

The 2016 calendar year will be challenging for small business in WA, as the lagged effect of the loss of high wage resource construction jobs and the impending cyclical downturn in dwelling construction constrain potential growth in retail trade and household consumption more generally - not to mention the demand for small business services from the mining industry.

The transition of the Australian economy away from the resources boom poses significant challenges, but presents opportunities as well, including the attractiveness for online retailers offering their goods and services to foreigners who have to part with less of their own currencies now that the Australian dollar has fallen.

Mining Services

While the beneficial legacies of the resources boom are mainly at the bigger end of town, all those new mines and oil and gas facilities need to be maintained and operated throughout their 20-30 year life spans. The wages generated by the export of their goods, flows through to small business in a variety of ways, including the high wage jobs of the workers employed by the mines and the infrastructure needed to export their goods to the rest of the world.

Aged Care

The ageing of the population is sometimes seen as a cost to the economy, however it also provides opportunities for small business, as an ever larger proportion of the nation’s population requires assistance, be it in their own home or in aged care facilities.

Summary and Conclusions

The end of the mining boom presents plenty of challenges for the Australian economy in the next couple of years, but as long as the Australian dollar remains competitive, the transition of the national economy will provide just as many opportunities, particularly to small business.

The changing structure of the economy is more than just the switch from mining to business and household services, but encompasses technological disruption that can be difficult to grapple. Bigger is by no means necessarily better when it comes to adapting to the threats and exploiting the opportunities presented by technological change – small business is invariably more nimble and does not have as much to lose if it needs to walk away from old practices, or new practises superseded by something even better.

None of this is to downplay the risk of a broad slowing in a national economy that has avoided recession for a quarter of a century. Businesses, big or small, ignore macro risks at their peril, but equally should look to reap rewards from opportunities presented by the changing economic climate.

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Alan Langford

Alan Langford
Chief Economist, Bankwest

Bankwest SWIFT code: BKWAAU6P | Find your BSB by logging into Online Banking.

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