The hidden story in our strong GDP figures – SME profits are still falling

Small business conditions have continued to decline according to the latest GDP figures, which show that although the overall economy grew by 1.2%, profits from unincorporated entities – the bulk of which are small businesses – actually fell by 0.5%.

Economists and business analysts have pointed to the figures, stating that small businesses have continued to suffer from the downturn in consumer spending and that as spending falls in the third quarter, small business results will decline in tandem.

The figures come just days after official insolvency figures show more companies have collapsed in the past 12 months than in any other year on record, with experts warning the 2011 calendar year could be the biggest for corporate collapses.

The national accounts figures show that while private sector profits rose by 10.1% in the June quarter, income from unincorporated businesses fell by 0.5%. Other negative results include the fact that domestic demand growth slowed to 0.7% from 1.4% in the first quarter.

Westpac economist Andrew Hanlan says the figures demonstrated businesses were doing it tough in the lead-up to June.

“I think what these figures suggest is that for some small businesses, coming towards the end of the financial year they were really struggling. And there are anecdotes that annual sales have fallen for many other retailers.”

“The bigger question is, where to from here?”

Some have pointed to the national accounts figures suggesting that consumer spending is actually on an upturn. But Westpac takes a different view, stating that the current state of the “cautious consumer” cannot be dismissed on one report.

The figures show that consumption growth was 1%, despite Westpac initially expecting a result of 0.3%. In fact, it even said that this is “hardly consistent” with the consumers’ move to caution, with a 0.3% fall in real household disposable income.

“Other parts of the consumer spending detail are more difficult to explain. Divergences between the national accounts and retail survey on household goods and clothing and footwear are particularly wide.”

“This makes us somewhat sceptical of the strong Q2 spending figures. However, at face value they suggest solid growth in consumer spending through the middle of the year.”

Hanlan says all indicators point to conditions worsening in the third quarter, highlighted by a number of disappointing figures yesterday. Wholesaling and retailing were “subdued”, at 2.2% and 0.9% respectively, for the year.

But Hanlan says while incomes have grown, with private non-financial profits up by 10.1%, and terms of trade up by 5.4%, it all depends on where that money is being spent.

“When the consumer sentiment index is well into the pessimistic territory, that translates into lost momentum for consumer spending,” Hanlan says.

“We suspect that things have weakened in the third quarter, and certainly for small business they may find it a little more difficult with regard to trading conditions. The backdrop in sharemarkets right now means we’ll potentially see a cautious mood for awhile yet.”

This article first appeared on SmartCompany.