Australian small businesses continued to grow in the June quarter, but the pace is slowing. New data from accounting software firm Xero shows sales rose 6.5% year-on-year, down from 7.9% in the March quarter and slightly below the historical average. The figures suggest that while the economy is still expanding, the drag from higher interest rates is becoming more apparent, especially in consumer-facing sectors.
What the data shows
Xero's small business index, which tracks transactions from hundreds of thousands of businesses using its platform, provides a real-time snapshot of the health of Australia's small business sector. The June quarter data reveals a clear split: sectors tied to essential services and business-to-business activity are outperforming, while those reliant on discretionary consumer spending are struggling.
Mining and utilities led the pack, with sales growth of 14% and 13% respectively. These sectors benefit from ongoing demand for resources and essential services like electricity and water, which are less sensitive to interest rate changes. In contrast, retail trade grew just 3.4%, hospitality 2.1%, and real estate services 4.7%. These are areas where households have been cutting back as mortgage payments rise and cost-of-living pressures mount.
The state-level data tells a similar story. While Xero did not provide full state breakdowns in the brief, the pattern suggests that regions with a heavier reliance on mining and resources are faring better, while those with larger retail and hospitality sectors are seeing slower growth.
Why this matters for investors
For everyday investors, this data is a useful barometer of the broader economy. Small businesses are often the first to feel changes in consumer sentiment and spending patterns. The slowdown in sales growth, particularly in retail and hospitality, aligns with other indicators showing that the Reserve Bank of Australia's rate hikes are cooling demand.
Investors should watch for further weakness in consumer discretionary stocks and sectors tied to housing, such as real estate services. On the flip side, the resilience of mining and utilities suggests that companies in these areas may continue to perform relatively well, even as the economy slows. For context, recent earnings reports from larger companies have also highlighted a mixed picture, with some firms like Avolta seeing tempered growth due to external headwinds, while others like Starbucks have lifted their outlook after strong sales.
The data also underscores the uneven nature of the current economic cycle. While the overall economy is still growing, the benefits are not evenly distributed. Small businesses in mining and utilities are thriving, but those in retail and hospitality are facing headwinds. This divergence is likely to persist as long as interest rates remain elevated.
What to watch next
Investors will be looking ahead to the Reserve Bank's next meeting and any further commentary on the outlook for rates. If consumer spending continues to soften, it could prompt the RBA to hold off on further hikes, which would be a positive for rate-sensitive sectors like retail and real estate. However, if inflation remains sticky, the central bank may need to tighten further, which would likely exacerbate the slowdown in small business sales.
Another key factor is the health of the labor market. Small businesses are major employers, and if sales growth continues to slow, it could lead to reduced hiring or even layoffs. This would have knock-on effects for consumer spending and the broader economy.
For now, the Xero data suggests that Australian small businesses are still growing, but the pace is moderating. Investors should keep a close eye on the sectors that are lagging, as they may signal broader economic trends. As always, diversification remains a prudent strategy in an uncertain environment.
