Lack of spending could spell trouble for small businesses over Christmas

New data has revealed that small businesses are being hit by consumer spending constraints.

Forecasts suggest that Australians will be spending less this Christmas, according to research from MYOB. This could spell danger for small businesses.

“The impacts of a tightening on consumer spending are starting to take a toll,” said Emma Fawcett, general manager at MYOB.

According to the data, small businesses are suffering under a high cash rate, high inflation and consequent decreases in consumer spending. Typically, the Christmas season is a crucial time for small businesses. A downward trend heading towards the end of the year could be detrimental – a situation that could be worsened by staff shortages and competition from bigger businesses.

According to research from Pureprofile Limited, a majority of Australians (65 per cent) plan on limiting their Christmas spending this year. Forty-two per cent expect to buy fewer gifts and 60 per cent plan on avoiding travel to cut back on discretionary spending.

The Pureprofile research found that the main reason behind the tightened consumer spending this Christmas is a rising cost of living, with 38 per cent of Australians saying they are concerned about their financial demands this December.

“As we head into the Christmas season, we are concerned this trend will continue, and SMEs will struggle to hit their sales target for a usually very busy period,” said Ms Fawcett.

This sentiment was echoed by Sean Langcake, head of macroeconomic forecasting at BIS Oxford Economics: “Once you account for those usual seasonal patterns, it is looking set to be very, very flat. It could even go a little bit backwards.”

Ms Fawcett said: “We are encouraging everyone to shop local.

“Even if you can’t spend as much as in previous years. Small businesses are the lifeblood of Australia’s economy, and if they are struggling, the whole economy will be struggling in the months ahead.”

At the RBA’s October 2023 board meeting, it held the cash rate steady at 4.10 per cent. This is the highest point that the cash rate has been set in the past 11 years.

The higher the cash rate, the more expensive it becomes for banks to borrow money. This has a flow-on effect on the wider economy, making debt more expensive to Australian businesses and individuals.

When the cash rate is higher, banks and lenders are incentivised to raise their own interest rates, meaning individuals, too, will pay more for borrowed money. More expensive debt means less spending, less production, and an overall decrease in economic activity and employment.

“When we look at 2022 data, in each month that interest rates went up, we can see a clear dip in spending across the days following the interest rate decision, before it then picks back up for the rest of the month,” said Ms Fawcett.

“However, in 2023, we can see the delayed impact [that] cost of living, interest rate increases, and inflation [are] having on small businesses.”