Caught between gloom and light

There are few better examples of the patchy economy in which SMEs work than today’s edition of SmartCompany.

On the one hand you’ve got what are frankly some very, very ugly figures on corporate collapses.

In the three months to September 30, there were 2,961 externally appointed administrations, up by 11.5% from the previous quarter, and up by a massive 18.3% from the same point in 2010. For two consecutive quarters now collapse numbers have topped 2,600 – that hasn’t happened since December 2008, when the GFC was arguably at its worst.

But it’s not all bad news. Yesterday’s consumer confidence report from Westpac was really quite positive, with sentiment rising more than 6% following last week’s interest rate cut.

This followed a survey of business confidence from NAB, which also showed confidence was on the rise, even if business conditions remain weaker than entrepreneurs would like.

For an entrepreneur planning the next 12 months, understanding the implications of these two crucial pieces of data is not easy – particularly when you also look at the Australian sharemarket, which dived 3% after the opening bell this morning after more bailout blues in Europe.

But my sense is that you need to keep focused on what’s really happening in the economy and be careful of the noise and old news.

The spike in insolvencies we’ve seen in recent months isn’t necessarily related to the business conditions that we’re seeing right now.

It’s well known that the Australian Taxation Office took a lenient line with SMEs during the GFC and has been taking a harder line on debt collection in the last 12 months.

So these collapses we saw in the September quarter were not about businesses suddenly hitting a flat spot and falling over. Rather, the businesses that are collapsing have been weak for some time and many have outstanding tax debts.

From what we are hearing, the collapse rates will probably remain high for the rest of 2011 and into 2012 as the ATO continues to chase what it is owed. But most of these are likely to be smaller companies that have been struggling along for some time, so it is hoped that the impact on the wider economy will be somewhat minimised.

The sharemarket movements also need to be taken in context. The market is extremely volatile at present and movements of 2-3% have become reasonably commonplace over the last three months as the situation in Europe and the United States ebbs and flows.

But looking past the volatility, the ASX 200 has actually been reasonably solid, rising 2% over that period. Indeed, since October 3, the market has risen 8.8%.

Over the last 12 months, the ASX 200 is down more than 10%, but we have actually held up reasonably well during a period when the market has been continually rocked by bad news from offshore.

The consumer and business confidence figures are really encouraging. Not only did consumer confidence rise strongly, but there were encouraging increases in the indices that measure economic conditions over the next 12 months (up by 18.8%), economic conditions over the next five years (up 7.4%) and the state of family finances now compared with 12 months ago (up 7%).

As CommSec economist Craig James has pointed out, consumers are still cautious about family finances in the year ahead – this index fell 0.8% in November and remains in negative territory.

We are not going to see a sudden outbreak of spending by consumers or businesses and the note of caution that James sounds should be heeded.

But the consumer and business confidence figures suggest the RBA’s rate cut may have had some affect already. And that’s a great sign that we could go into 2012 with a bit of positive momentum.