The re-opening of the economy held a promise for businesses greatly affected by the pandemic on their way to recovery. The first quarter of 2022 saw the emergence of a new Covid-19 variant, but there was little to no economic spillover. The labour market beat expectations, and supply chain and logistics disruptions have eased. As things begin to look up, inflation is the new dark cloud hovering in the background.
Economic Outlook for Q2 of 2022
A report published by the Reserve Bank of Australia in May 2022 forecasted that the economic growth would be slow and the inflation rate would increase at a more rapid pace than forecasted a few months ago. While the effects of the pandemic are no longer spilling over to the economy, inflation presents an even more significant challenge: supply chain disruptions, rising commodity prices, and higher interest rates.
The economic outlook for the second quarter of this year is undoubtedly looking bleak, especially for mid-sized and smaller businesses, as monetary policies and grants from the government are lifted as the economy re-opens. Tightening the built, focusing inward as much as externally and making sure your small business insurance is updated and in place could be critical.
Economic experts are hoping that sustained momentum in consumer spending, along with an increase in GDP forecasts for 2022, will compensate for the impact of inflation on businesses. The unfolding of the surge in energy prices on a global scale also plays a vital role in the overall inflation forecasts within Australia. Experts agree that any reduction in fuel excise won’t have any real impact given the shocking growth rate of fuel prices.
As of this writing, the RBA expects the inflation rate to peak at 6% in the second half of 2022. However, as volatile as the economic market has been, and with no end to the rising fuel prices in sight, this forecast could change.
Impact on Small Businesses
So, what do these numbers mean for small businesses? It's not great.
According to data from the Australian Bureau of Statistics (ABS), one-third of businesses have plans to raise their prices to cope with rising fuel and energy prices and the growing cost of products and services.
About 43% of businesses experienced an increase in their operating expenses in May 2022 compared to the previous month. This was a significant rise from last year when only 22% of businesses saw their operating expenses grow. While operating expenses are increasing, the trend is reversing for their revenue.
Based on the same report from ABS, only 14% of businesses saw a revenue increase. This was even lower than the data from April 2022, wherein 19% of companies had a revenue increase.
With the rising inflation and commodity prices, along with the ever-increasing fuel and energy prices, small businesses are caught in the middle. As of May 2022, ABS reported that 48% of small Australian businesses had no plans of increasing their prices, so the burden is on them to suffer the loss of revenue.
If trends like this continue, this could severely impact the local economy, especially with future consumer spending also at risk. As the inflation rates go up, the purchasing power of the Australian dollar goes down. Also, the increasing inflation rate might put many households on budget cuts, directly impacting consumer spending for the rest of 2022.
What Businesses Can Do to Beat Inflation
Skyrocketing inflation with no clear end in sight is making small businesses rethink their financial strategies in 2022. The best way to develop a solid plan moving forward is to assess your business' current financial health.
You can also work with insurance brokers to find adequate policies and terms to ensure your business is inflation-proof. For example, insurance inflation protection is one available product that adjusts the value of your benefits based on percentages to match the inflation rate in the market.
This is the time to be crunching numbers. Make sure you comb through every expense and aim to identify the drivers of cost in your business to take actionable steps toward trimming the expenses and improving your slim profit margin.
You may also read:
What does the 2023-24 Federal Budget mean for small business?