SMEs expect weak profitability for the next 6 months

But they are optimistic on sales turnover.

SMEs expect a small lift in revenue during the second half of 2017 in anticipation of stepped up activities relating to the year-end festive season. As a result, SMEs are slightly more optimistic about the next six months.

The latest SBF-DP SME Index (the Index) increased slightly, by 0.5 points, to 50.9. Whilst the improvement is modest, it is the second consecutive quarter in which SME optimism has improved across all six industry sectors, namely commerce/trading, construction/engineering, manufacturing, retail f&b, business services and transport/storage.

The Index measures the business sentiment of SMEs for the next six months (Q3 and Q4 of 2017) and is a joint initiative of the Singapore Business Federation (SBF) and DP Information Group (DP Info). More than 3,600 SMEs were surveyed in April and May on their outlook.

The optimism is strongest in the Business Services sector with an Overall Index Score of 51.6, up from 50.8 last quarter. The Retail/Food and Beverage sector is the second most optimistic industry with an increase in its Index Score of 1.0 point to 51.3, indicating its improved confidence of better consumer demand during the coming two-quarters.

The Manufacturing sector is the least optimistic of the six industries. However, this quarter is the first time in a year it has recorded a positive score, edging up from 49.7 to 50.1.

The most positive trend in this quarter’s Index is the improvement in turnover and profit outlook. All the six industry sectors measured have recorded improvements in their outlook for turnover and profits for two consecutive quarters.

The Overall Turnover Expectations Index Score for this quarter is 5.05, up from 4.93 last quarter and 4.83 in the quarter before that. This means SMEs expect their sales to increase compared to the first half of the year.

Whilst sales are expected to increase, the outlook for profitability remains weak, with many SMEs expected to record limited profits over the next six months. While the Overall Profit Outlook Score of 4.97 is an improvement from that of the last quarter, it still indicates a weighed-down sentiment. This is the fourth consecutive quarter where the Overall Profit Outlook score is below 5.0, implying that SMEs are expecting a protracted period of reduced profits or even losses.

SMEs continue to struggle with costs such as salary and material prices. Operating costs in Singapore continue to be high with margins being eroded. Cost pressures, including the impending increase in utilities charges expected in the coming months, are dampening the SME community’s profit outlook. At the same time, SMEs need to spend money to grow their opportunities internationally.

Joanne Guo, Assistant Executive Director, Strategy and Development, of the Singapore Business Federation said, “It is heartening to note the increase in the latest Overall SME Sentiments Index although this is a slight increase, mainly due the move into the year-end festivities. The reading is the lowest second half reading in the last three years. This continues to reflect the uncertainty in the global economy and the tough local business environment.