The two key recent shocks to the Australian economy have been to commodity prices and household behaviour.
Commodity prices have risen substantially, which has driven a once-in-a-generation mining investment boom and pushed the Australian dollar to its highest level in more than 30 years.
At the same time, households have become more cautious in their spending behaviour as the global financial crisis reduced personal wealth. So, households have increased saving to rebuild their assets.
Overall, this has resulted in very uneven growth in the Australian economy. The mining industry has expanded rapidly, while other sectors of the economy have been held back. The strength in mining meant that the RBA maintained tight policy settings through 2011 and only cut interest rates slowly through 2012, despite the European financial crisis and lacklustre growth in the US weakening local business confidence. The strength of the Australian dollar and tighter settings of monetary policy have made the business environment tough for many firms.
Indeed, much of the economy has felt weak, despite the fact that the overall economy has been growing at around its trend pace. Parts of the economy that are directly associated with mining have done very well, while firms involved in the retail, housing and tourism sectors have generally done poorly.
Most small to medium-sized enterprises (SMEs) do not have large exposures to mining, so conditions have been tough for many of them. Many SMEs have consequently held back on their investment and hiring decisions over the past 18 months or so and borrowing by small businesses has been weak.
These effects have been compounded by falling house prices. House prices have reduced the willingness of small businesses to expand operations, both because they limit demand for the goods and services that small businesses produce and because many small businesses rely on their house value as collateral against their loans.
But conditions are set to improve in 2013, particularly for SMEs.
Having cut interest rates by 1.75 percentage points over the past 15 months, the RBA has now brought mortgage rates to around 1 per cent below their average level. That should start to support a rise in housing prices; indeed, we’ve already seen the housing construction cycle bottom out.
The pick-up in housing construction is also expected to support a rise in retail sales, as households seek to fill their new houses with durable goods, which are still typically purchased from traditional shopfront retailers.
We also expect the effect of the drag on growth from the high Australian dollar to begin to fade in 2013, as firms have already made significant adjustments to their operations in response to the high currency. In particular, we expect some improvement in the tourism industry as there is a slowdown in growth in outbound tourism and further strong growth in international arrivals from Asia, particularly from China.
As local small businesses tend to be more exposed to conditions in the housing, retail and tourism industries – and we expect a recovery in these sectors – our view is that 2013 should be a better year for SMEs than 2012.
