SINGAPORE’S small and medium-sized enterprises (SMEs) have remained in contractionary mode for the fourth straight quarter, marking a full year of contraction in 2023, said OCBC on Thursday (Jan 18).

The bank’s quarterly SME Index posted an overall reading of 49.5 points in Q4, down slightly from 49.6 points in the preceding quarter.

“Since its launch in Q1 2021, the index had been in expansionary range for eight consecutive quarters over 2021 and 2022, before dropping into contraction in 2023,” OCBC said.

Several industries that had previously been in expansionary mode for consecutive quarters – education, food and beverage (F&B) and business services – turned contractionary in the latest reading.

Of the 11 industries represented in the index, only the retail (50.9 points), building and construction (50.3 points) and healthcare (50.2 points) sectors were in expansionary range for Q4.

A reading above 50 indicates improved activity, while one below 50 indicates deterioration relative to the same period a year ago.

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The index, which measures SME business health and performance, is derived from the transactional data of more than 100,000 SME customers of OCBC in Singapore with annual sales turnover of up to S$30 million.

OCBC head of global commercial banking Linus Goh told The Business Times that, despite external headwinds, Singapore’s domestically oriented sectors have generally performed well in 2023, and acted as a buffer against suppressed global trade.

“The domestic sector performed quite well, and if you exclude the externally oriented parts of the domestic sector – such as the trading and distribution sides of F&B and healthcare, for example – I would say that (the sector) did relatively well,” he said.

In particular, the building and construction sector has continued to post good results, he said. It registered a reading of 50.3 points in Q4, down slightly from 50.8 points in the preceding quarter. On a year-on-year basis, collections and payments within the sector grew by 14.1 per cent and 14 per cent, respectively.

But even as a steady pipeline of public and private construction projects has helped to support growth within the sector over the past year, the reading has been on a downward trend since Q1, OCBC said.

SME bosses within the sector are also more pessimistic about the business outlook in the near term, OCBC said, with upside cost pressures expected to come into play.

In healthcare, the year-end surge in Covid-19 cases would have generated “modest” demand for healthcare services in Q4, contributing to the sector turning expansionary – at 50.2 points – after two quarters of contraction, the bank added.

For 2024, the SME Index is expected to remain flat in the first half, Goh said. Rising business costs are expected to weigh on SMEs, with those who are not in growth modes especially hard-hit.

“If you’re in a weaker mode and you’re still having (increased costs), it is quite significant,” he said.

In terms of business sentiment, 47 per cent of 1,400 business owners polled in Q4 expect their businesses to perform better in the next six months, compared with 49 per cent in the preceding quarter.

Top of mind for local SMEs would be China’s growth in 2024, Goh said, though any “clear sign of China’s impact” will likely only come through the second half of this year.

“For the better part of the decade, China’s growth has been a driver of growth in the region, in Singapore, and right across the industries,” he said.

“At the start of this year, I think the businesses still have some hope that it might come through – but not big hope – and certainly not like it was last year.”

Unresolved US-China tensions, along with the threat of a prolonged impact on the logistics and manufacturing sectors if the ongoing situation in the Red Sea escalates, are also key issues for local SMEs in the near term, he added.