Small businesses hit by record wage rises, slowing sales growth

Xero research reveals the combined effect of a tight labour market and increasing inflation.

This article was originally featured in Accountants Daily

A double whammy of record wage increases – led by construction – and a slump in sales growth hit small businesses in April, according to the latest Xero research. 

Wages increased 4.1 per cent year-on-year during the month, the fastest pace recorded by the research since it commenced in 2017, with pay in the construction industry up 5.1 per cent, manufacturing 4.6 per cent and hospitality 4.5 per cent, out in front.

At the same time, sales growth declined to 5.8 per cent after more than a year of double-digit increases, with arts and recreation, education, and media and telecommunications the worst hit.

Despite the reverses in fortune the Xero Small Business Index – a combined metric that takes in jobs growth and time to be paid – rose to 122 points, its highest in more than a year.

The substantial increase in wages was a reflection of the tight labour market, said Xero’s managing director for Australia and Asia, Joseph Lyons.

“This month, wages have jumped significantly among small businesses and at a rate higher than we have seen since the index began,” he said.

“While this is a positive sign in the health of the sector, we should be cognisant that small businesses are facing rising costs across the board as inflation continues to climb. 

“It’s important for the incoming government and broader industry to consider how they can alleviate some of this growing financial burden.”

Xero economist Louise Southall said the slowdown in sales growth came because inflation was rising faster than wages, which was cutting the buying power of households.

“This means small businesses are facing the dual challenge of managing rising costs alongside falling purchasing power of their potential customers,” she said.

Ms Southall said that the overall increase in cost of living had seen consumers shifting their spending to address more pressing bills.

Sectors that rely on discretionary spending were worst hit, with education and training growing only 3.4 per cent while arts and recreation increased just 2.4 per cent.

“This can be seen in the sales results for April – particularly in sectors such as arts and recreation and retail. Industries that are not directly affected by discretionary consumer spend, such as professional services, saw a larger sales increase,” Ms Southall said.

The Xero research found jobs growth failed to track wage growth and remained weak in April, falling 1.1 per cent year-on-year following a 1.3 per cent decline in March.

Small businesses are finding it hard to recruit staff, with Western Australia – which continues to struggle with COVID – seeing the biggest impact.

The Xero Small Business Index is based on aggregated and anonymised transactions from thousands of small businesses using the company’s software. It is created in collaboration with Accenture and is part of the Xero Small Business Insights program.