Small businesses in Australia saw another month of improved performance with the Xero Small Business Index rising four points in April 2022 to 122 points, largely driven by wage growth, which is up 4.1% year-on-year – the biggest increase in the history of Xero’s Small Business Insights series since 2017.

However, there are signs of emerging risks, with a sharp slowdown in sales growth in April to 5.8% YoY from 12.7% YoY in March. This is likely to be at least in part due to rising cost of living pressures which is reducing households’ capacity to spend.

Xero managing director for Australia and Asia, Joseph Lyons said, “This month, wages have jumped significantly among small businesses – and at a rate higher than we have seen since the Index began.

While this is a positive sign in the health of the sector, we should be cognisant that small businesses are facing rising costs across the board as inflation continues to climb. It’s important for the incoming government and broader industry to consider how they can alleviate some of this growing financial burden.”

Wages rose to unprecedented levels in April to 4.1% YoY, a high not seen since the Small Business Index series began in January 2017, reflecting the tight labour market as small businesses struggle to retain staff and compete for new talent.

“While this is a record rise in small business wages, inflation is rising faster which is cutting the buying power of households. This means small businesses are facing the dual challenge of managing rising costs alongside falling purchasing power of their potential customers,” Xero economist, Louise Southall said.

Sales slowed in April to 5.8% YoY after 13 months of strong double-digit growth, with industries that rely on discretionary spending significantly impacted.

“With the broad-based increase in the cost of living, consumers are shifting their spending to more pressing bills that cannot be avoided. This can be seen in the sales results for April, particularly in sectors such as arts and recreation and retail. Industries that are not directly affected by discretionary consumer spend, such as professional services, saw a larger sales increase,” Southall said.

Job growth remained weak in April, falling 1.1% YoY after a 1.3% YoY decline in March. With vacancy rates remaining high, small businesses are battling with the inability to find new staff. Western Australia saw the biggest impact with a decline of 2.6% YoY potentially due to Omicron case surging and disrupting workplaces.

“The decline in jobs in April is likely not an immediate reaction to weaker sales but rather is still reflecting ongoing challenges in finding staff. However, should sales continue to be soft, we could see this start to affect the job market in a few months,” Southall added.