New Xero data shows small business sector sales are booming over the year — but economists say inflation could mask the real damage

The performance of Australia’s small business community is improving, new data from Xero and the Australian Bureau of Statistics suggests, but economists and industry participants have advised that a ‘phantom’ spending downturn may be hidden in those rosy figures.

Global small business platform Xero’s Small Business Index rose seven points to 119 over August, the company said Thursday, with the figure buoyed by jobs growth, wage increases, and an uptick in sales.

Jobs growth among small businesses rose 6.6% year-on-year, the data shows, demonstrating how Australian firms rebounded from the COVID-19 restrictions which lingered through much of 2021.

Wages grew 4.1% over the year to August, Xero said.

And sales exploded by 16.3% over the year, suggesting Australians are even keener to open their wallets in mid-2022 than they were in 2021.

Joseph Lyons, Xero’s APAC managing director, says the fresh Small Business Index findings indicated resilience across the sector.

“The August result demonstrates that small businesses are successfully navigating a period of increasing inflation and cost-of-living pressures,” he said.

Optimistic data may mask softened sales volumes, economists say

That optimistic outlook is also reflected in new retail sales growth data from the ABS, released Wednesday.

Retail spending grew 0.6% in August, the ABS said, representing a surprise eighth consecutive monthly uptick.

But the data came as something of a surprise to economists and industry participants, who are waiting on the Reserve Bank of Australia’s successive cash rate hikes to significantly suppress household purchasing power.

While some retail spending was down over the month — clothing, footwear and personal accessories, and other retailing, faced monthly drops in spending of 2.3% and 2.5%, respectively — the apparent strength of consumer spending has onlookers searching for answers.

Now, some observers suggest retail sales growth figures put forward by the ABS may be driven by inflated prices, not any significant growth in sales volumes.

Responding to the ABS figures, Paul Zahra, CEO of the Australian Retailers Association, said this warning sign may appear in the otherwise “truly remarkable” numbers.

“There is likely to be a lag effect from current inflationary conditions,” he said, with the full impact of the RBA’s decisions on consumer spending habits to become apparent in early 2023.

In a bulletin discussing the ABS numbers, Westpac senior economist Matthew Hassan agreed, suggesting, “higher retail prices are likely concealing a more pronounced softening in retail sales volumes”.

Creditorwatch chief economist Anneke Thompson says this masking effect is “absolutely” present in the latest ABS data.

Certainly, not every industry observer believes the latest figures hide a real downturn in sales volumes.

Commenting on the Small Business Index, Xero economist Louise Southall said: “The rise in sales isn’t solely due to higher prices, it also reflects more goods and services being sold.”

Nevertheless, some economists still believe a downturn in sales values is around the corner, even if it is not yet reflected in today’s data.

“After a post-lockdown spending and holiday ‘binge’, we are likely to see many households reduce their spending coming in to Christmas,” Thompson said.

“Particularly lower income households, who feel interest rate, petrol and other cost rises most acutely.”