Prime Highlights:
A NAB survey shows 75% of small to medium-sized enterprises (SMEs) expect their operating costs to rise in 2025, with 22% anticipating a decrease in profitability.
Builders like Joey Pamment face significant slowdowns, with project inquiries dropping by up to 75%, and cost pressures pushing clients to delay or cancel projects.
Skilled labor remains scarce, driving up costs for tradespeople and contributing to overall price increases in construction and other sectors.
Key Background:
Australian small to medium-sized enterprises (SMEs) are preparing for another challenging year, as they brace for rising costs driven by persistent inflation, a tight labor market, and global uncertainties. A recent survey by NAB found that 22% of businesses expect profitability to decrease in the coming year, while 75% anticipate operating costs to rise. Only a small fraction, 2%, expect cost reductions, highlighting the tough economic environment.
The construction industry, particularly, has been heavily impacted, with builder Joey Pamment of Pamment Projects reporting a significant slowdown in business. Inquiries for projects have dropped by up to 75%, and customers are delaying or scaling back due to cost-of-living pressures. The surge in construction material prices and a shortage of skilled labor have further strained operations. While high-end projects continue, smaller ventures have stalled. Pamment emphasized the difficulty in absorbing rising costs, with businesses having to pass expenses onto clients to stay afloat.
Labor market conditions remain strong by historical standards, with unemployment still low at around 4%, but skilled workers remain in short supply. This shortage has driven up costs for tradespeople, exacerbating challenges for SMEs.
The rise in insolvencies is another concern, with over 10,000 insolvencies recorded in the current financial year alone. Small businesses are particularly vulnerable due to limited cash buffers and fewer options for cost-cutting measures compared to larger enterprises. However, experts, including economist Leonora Risse, suggest that a potential interest rate cut could improve consumer confidence and help stimulate demand, offering a glimmer of hope for SMEs in 2025.
In response to these challenges, many businesses are turning to technology and innovation to manage costs. For instance, vertical farm April Sun has reduced its energy use by 40% through improved climate control systems. Despite ongoing uncertainty, businesses remain cautiously optimistic, with some expecting the easing of interest rates to boost consumer spending and economic activity later in the year.
