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SMEs' optimism improves again, but profit outlook stays weak

SBF executive sees the uptick as mainly due to anticipation of year-end festivities, not a clear sign SMEs are out of the woods

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Small and medium enterprises (SMEs) are slightly more optimistic about business prospects for the next six months, marking the second consecutive quarter that the outlook has improved.

Singapore

SMALL and medium enterprises (SMEs) are slightly more optimistic about business prospects for the next six months, marking the second consecutive quarter that the outlook has improved.

The SBF-DP SME Index - a joint initiative by the Singapore Business Federation and DP Information Group - increased marginally by half a point to 50.9.

A reading above 50 indicates that SMEs expect growth in the coming two quarters, while a reading below 50 indicates pessimism. The latest survey measures the business outlook for Q3-Q4 2017 from a poll of more than 3,600 SMEs in April and May.

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Business optimism appears to be on an upward trajectory since two quarters ago when it reached an all-time low of 49.8.

But Joanne Guo, SBF assistant executive director, strategy and development, said that this uptick was mainly due to anticipation of the year-end festivities, and not a clear sign that SMEs are out of the woods.

"The reading is the lowest second half reading in the last three years. This continues to reflect the uncertainty in the global economy and the tough local business environment."

The overall turnover expectations index score for this quarter is 5.05, up from 4.93 last quarter and 4.83 in the quarter before that.

A reading above 5 signals growth while a reading below signals contraction.

However, the overall profit outlook was under 5, indicating that SMEs are expecting a protracted period of reduced profits or even losses. It now stands at 4.97, up from 4.82 one quarter ago, and 4.71 for the quarter before that.

Even as the profit outlook for SMEs continue to be weak, their expansion appetite remains healthy at 5.6, up from 5.58 a quarter ago. Hiring expectations have also gone up steadily over the past few quarters, increasing from 5.17 last quarter to 5.28 this time around.

The Index saw an improvement in the business sentiment across all six industry sectors, namely Commerce/Trading, Construction/Engineering, Manufacturing, Retail/Food and Beverage (F&B), Business Services and Transport/Storage.

The Business Services sector showed the greatest optimism, going up from 50.8 last quarter to 51.6. The Retail/F&B also increased one point to 51.3.

Even though the manufacturing sector is now in positive territory with an index score of 50.1, it is still the least optimistic of the six industry sectors. It has edged up 0.4 point since the last quarter.

The manufacturing sector also experienced the greatest decrease in their business expansion expectations, down from an index score of 5.65 last quarter to 5.48 this quarter. This dip comes after several quarters of sustained high levels of expansion.

Overall business sentiment up

ANZ economist Ng Weiwen said that this is in line with expectations that the growth of the manufacturing sector would moderate in the second half of 2017, in part due to slowing demand from China.

Furthermore, the recent growth trajectory in manufacturing was only within the electronics and precision engineering clusters, with the rest either contracting or moderating, he added.

On the overall outlook, he pointed out the dichotomy between SMEs' turnover expectations and profitability expectations as a point of concern going forward.

"Notwithstanding the expectations of higher sales, a lot of SMEs continue to be quite bearish in their outlook for profitability. The optimism (from the overall business outlook Index score of 50.9) masks this ongoing dynamic where companies expect higher sales so they want to hire more, but profits are not going up as much to justify that headcount. It is an indication that the labour market could remain subdued."

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