Third quarter deceleration takes demand back to pre-pandemic levels, the latest Xero data shows.
Small business sales growth slows after strong first half
The wind went out of sales growth in Q3 to erode a strong start to the year and fall back below pre-pandemic levels, according to the latest Xero small business data.
Its Small Business Index for July–September registered sales growth of 6.2 per cent, depressing the year-on-year figure to just 5.5 per cent compared with a pre-pandemic average of 7.8 per cent.
That reversed strong growth of 10 per cent over the first half and while Xero said it was a “concern”, it lined up with expectations.
“It is not surprising given the pressure consumer budgets are under amid high interest rates and persistent inflation,” it said. “Encouragingly, Australia's sales growth results are by far the strongest of the five Xero Small Business Index countries (Australia, New Zealand, the UK, US and Canada).”
Sales growth in the September quarter was led by healthcare (+13.2 per cent year on year), education and training (+10.5 per cent), construction (+8.1 per cent) and public administration and safety (7.7 per cent).
The weakest industries were agriculture (-6.2 per cent), wholesale trade (-1.1 per cent) and retail trade (-0.8 per cent).
Demand slowed in all states and territories with Queensland strongest (7.5 per cent) and Tasmania weakest (2.8 per cent).
The slower sales growth went hand in hand with a deceleration in wage rises, which increased 2.7 per cent in the quarter for an annual figure of just 1.9 per cent, well below the 3 per cent pre-pandemic average.
The largest wage rises were in hospitality (+4.4 per cent year on year) and the smallest in healthcare (+1.8 per cent).
“These results, while positive for inflation and cost control within small businesses, are less positive for the sales outlook as real wages continue to fall,” Xero said. “This puts more pressure on already stretched household budgets and leaves them with less to spend in small businesses.”
Xero economist Louise Southall said the mixed results gave some cause for optimism.
“While small business performance has dropped slightly in recent months, Australian small businesses remain remarkably resilient, given the challenging economic environment of high interest rates and persistent inflation,” she said.
Two other key indicators moved little, with job growth of 2.7 per cent for the year to September in line with the first half average and payment waiting times stable at 22.9 days.
However, payment times varied substantially between industries, with small businesses in healthcare paid an average of only 1.9 days late in the three months to September compared to 9.5 days in education and 12.5 days in wholesale trade.
Xero Australia country manager Will Buckley said small businesses were holding steady and, in some industries, even thriving.
“With the holiday period approaching, we encourage Australians to support small businesses where they can,” he said. “This might mean shopping small, leaving positive reviews or connecting with business owners.”
“While retail and hospitality have had a difficult few months, they will be hoping for a resurgence during the festive season.”
The overall Xero Small Business Index, which is based on aggregated and anonymised transactions from hundreds of thousands of small businesses, fell two points to hit 122 points, only marginally lower than the first half average of 127.