Small and medium-sized enterprises (SMEs) are the backbone of the Australian economy, but a new report by KPMG suggests they face a tough road ahead.
The Quarterly Economic Outlook, released in July 2024, forecasts sluggish economic growth coupled with rising costs. This combination could significantly squeeze profit margins and hinder business expansion for SMEs. The report forecasts GDP growth to hover around the mid-1% range for the remainder of 2024, with unemployment expected to rise slowly from the current 4.2% to 4.7% by mid-2026. Although wages growth remains high, it has peaked and is expected to soften, while inflation is projected to decrease from 3.8% to 2.7% by the end of next year. The cash rate is anticipated to remain unchanged throughout 2024, with a rate cut likely in the first quarter of 2025.
Dr. Brendan Rynne, KPMG’s Chief Economist, highlighted that with 0.1% growth in the March quarter and an annual growth rate of just 1.1% over the past 12 months, the Australian economy has narrowly avoided recession this year. However, Q2 national accounts are expected to show slight improvement. Excluding the pandemic period, this still represents the weakest growth in over twenty years.
“Households are continuing to struggle with increases in the general cost of living, which can be seen in the fall in the household saving ratio in the first half of 2024. This is due to gross disposable income lagging behind the rise in consumption costs, although prices for goods will start to soften in line with easing domestic demand.
“Renters have faced strong rent rises, while those with mortgages have the additional burden of managing higher loan repayments. These factors suggest the headwinds to household consumption will persist in the second half of 2024, as interest rates are now expected to stay higher for longer. Inflation remains sticky, while households draw down on their savings buffers.
“The gradual slackening in the labour market will reinforce downwards pressure on household consumption. The RBA will also be very concerned at stagnant levels of productivity growth being outpaced by wages growth, although this is now starting to soften. Services inflation remains high as a consequence of elevated labour costs – despite an easing in labour market conditions.
He adds that some relief for households will come from the Stage 3 tax cuts and various cost-of-living relief packages from the Commonwealth and State governments starting in July. However, the impact of these fiscal initiatives on the real economy remains uncertain. “How much these fiscal initiatives will flow through to the real economy remains uncertain. However, while many of these packages have been designed to mechanically reduce headline inflation, the RBA has already acknowledged that it will ‘look through’ the effects of these policies and focus on underlying price pressures still existing in the economy.
“Internationally, the global economy has remained resilient, with several central banks now starting to reduce interest rates. When considering interest rates from an inflation-adjusted perspective Australia’s real policy rate is notably lower than those in the US, UK, Canada and Europe, essentially because those markets are further down the disinflation pathway than we are.
“However, the current inflation cycle in Australian lagged other advanced countries (by around 6 to 9 months), so it would be expected any policy rate cuts to occur with a similar lag. We can therefore expect a rate cut in the first quarter of 2025.”
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