SME business conditions fall further: Economy roundup

Rising wage costs and slower profit growth are putting the squeeze on businesses, according to the Australian Chamber of Commerce and Industry’s May small business survey.

The survey’s profit index fell from 47.4 in the December 2007 to 44.4 in May 2008, well below the key 50 point level separating positive from negative sentiment.

At the same time, wage growth continues to put businesses under pressure, with the index lifting slightly from its already high December 2007 level of 68.1 to 68.2 this month.

And the 2000 small business owners and managers who participated in the survey do not expect things to get better any time soon, with already gloomy expectations for the Australian economy growing even gloomier this month.

That pessimism may have been even more intense if the survey respondents had the opportunity to glance at the minutes from the Reserve Bank of Australia’s most recent interest rate meeting released today.

The minutes reveal that the RBA came very close to lifting rates again when it met in early May.

“Members spent considerable time discussing the case for a further rise in the cash rate. But on balance, given the substantial tightening in financial conditions since mid 2007, and the extent of uncertainty surrounding the outlook, the board decided that it was appropriate to allow the current setting of monetary policy more time to work,” the minutes state.

That leaves the RBA on a watching brief, with further significant signs of demand moderation required to hold off a further rate rise.

“Should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, the outlook, and the stance of policy, would need to be reviewed,” the statement says.

JP Morgan chief economist Stephen Walters says it is significant that the RBA appears not to have even discussed the possibility of a rate cut.

“The RBA is on hold given heightened uncertainty, but the dominant risk is that the RBA may yet be forced to raise the cash rate,” he says.

On the markets today, at 12.15pm the S&P/ASX200 is down 0.4% on yesterday’s close to 5926.8.