Rocky end to 2023 for smaller firms as economic headwinds hit consumer-facing sectors: Report

SINGAPORE – The final three months of 2023 were far from festive for smaller businesses, with deteriorating economic conditions making life a bit more difficult than in the third quarter, a report noted on Jan 18.

An index focused on small and medium-sized enterprises (SMEs) fell to 49.5 points in the three months to Dec 31, down a smidgeon from 49.6 points in the third quarter and marking the fourth straight quarter of decline.

A reading below 50 indicates worsening business activity relative to the same period a year earlier. A reading over 50 indicates an improvement.

The quarterly index compiled by OCBC Bank is based on the transaction data of more than 100,000 of its SME customers here with annual sales turnover of up to $30 million.

Mr Linus Goh, OCBC’s head of global commercial banking, said several industries serving the domestic market, such as food and beverage (F&B), education and business services, turned slightly contractionary after expanding for six or more quarters.

“The externally oriented industries led by wholesale trade, manufacturing and transport and logistics remained contractionary as headwinds persisted in global trade,” he added.

SMEs will likely continue to face rising business costs and slowing global demand in 2024, while those looking to venture overseas may be impacted by geopolitical uncertainties, Mr Goh told The Straits Times.

Manpower-intensive sectors such as transport and logistics are most at risk, especially if there is prolonged impact from the ongoing Red Sea conflict, he said.

SME sales collections and payments slipped in the fourth quarter due to soft external demand and domestic cost challenges, the report found.

Only three industries – retail, building and construction, and healthcare – recorded better performances in the fourth quarter compared with the same period a year earlier. This compares with five of such industries in the third quarter and four in the second.

The retail sector’s score was unchanged from the previous quarter at 50.9, while building and construction continued to expand even as its reading dipped to 50.3, down from 50.8 in the third quarter.

A steady pipeline of public and private construction projects has supported the sector’s growth over the past year, but the reading has been on a decline since the first quarter of 2023 in the light of an economic slowdown and inflationary pressures.

Healthcare posted a score of 50.2, reversing two quarters of contraction, thanks to higher collections and payments.

While firms that distribute medical supplies continued to underperform, the industry was buoyed by healthcare providers amid the latest wave of Covid-19, which would have generated some demand, noted the report.

Meanwhile, the education industry turned slightly contractionary in the wake of declines in collections and payments at training centres.

A separate OCBC poll showed that only a quarter of respondents within this sector experienced an improved business performance in the fourth quarter compared with the previous three months – the lowest share across all sectors.

A slowdown in wholesale trade turned the F&B industry contractionary, said the report, adding that spending during the year-end festive season was likely moderated by an increase in outbound travel and higher prices.

The business services industry shrank as well, reversing its expansion in the third quarter. It was weighed down by weaker demand for advisory, consultancy and human resources services amid softer hiring and businesses cutting costs.

However, the business services, F&B and education sectors might recover in 2024 as they had been consistently expanding for at least five quarters before turning contractionary in the fourth quarter, said Mr Goh.

“This dip might be due to the extraordinary outbound travel demand in the fourth quarter, so we should have a better sense (of how these sectors will fare) from the findings in the first quarter of this year.”

The poll of 1,400 business owners in the fourth quarter showed that SMEs were slightly less optimistic about the outlook for the first half of 2024 and were also concerned about rising costs.

It noted that 14 per cent of firms expect a decline, slightly higher than the 13 per cent in the third quarter, but 47 per cent expect their businesses to perform better over the next two quarters, while 39 per cent predicted that performance will remain the same.