The Point

Small businesses are doing it tough. Cloud accounting platform Xero has some answers

Xero’s annual Xerocon event is known as ‘Coachella for accountants’ – a reference to a Californian rock concert with a cult-like following.

The ASX-listed cloud-accounting platform has a pretty strong following itself now, with more than 3.7 million subscribers in 180 countries.

That’s led to a pretty good understanding of the state of small-to-medium businesses (SMBs), says Pendal equities analyst Elise McKay.

Xero is seeing SMBs report slower sales growth in Australia, Canada, NZ, the UK and the US, though wage pressures are starting to ease in Australia, NZ and the UK, says Elise.

While SMBs are still unsure about the impact of AI, Xero is adding the technology to speed up repetitive tasks or provide better insights that help humans focus on high-value strategic activities.

“For example, helping to better enable reconciliations or provide better forecasting tools around things like cash flow. And potentially using generative AI to improve customer support.”

The good news? We’re avoiding recession. The bad news? Living standards are going backwards

This week the ABS released our latest national accounts – quarterly estimates of economic flows such as GDP, consumption, investment, income and saving – for the June quarter.

What did we learn?

“First, the good news,” says Pendal head of bond strategies Tim Hext. “We are avoiding a recession.

“GDP is 2.1% higher than a year ago, though slowing. It’s been 0.4% for two quarters now and will likely end the year near 1.2% – slightly higher than the RBA forecast of 0.9%.”

The bad news?

“We’re clearly in a per-capita recession,” says Tim. That means economic growth is not keeping pace with population growth.

Which means the average person is going backwards in their standard of living.

“Our population grew by 0.7% in Q2, the economy only 0.4%. GDP per capita is now 0.3% lower than a year ago and 0.6% lower than six months ago.”

Why is this happening and what’s next?

What’s driving ASX stocks this week

Three things stood out among the best industrials this ASX earnings season

What did the best-received results have in common this ASX earnings season?

Among industrials – which includes industries such as transportation and machinery – it was all about pricing power, cost of debt and where a company sits in its business cycle, says Pendal analyst Anthony Moran.

“Some companies with pricing power have not only kept up with prices, but have also been able to achieve some margin expansion,” says Anthony. He points to James Hardie and Boral as examples.

This season marked a return to more typical themes after cost control, staffing and inflation dominated post-Covid reporting, Anthony says.

And don’t forget the weather.

“It’s not just resilient demand in Australia. It’s also the good weather. That’s quite significant for Australian construction companies.”

Anthony has details here

What about the rest of the ASX? Find out next Thursday when Pendal’s head of equities Crispin Murray delivers his bi-annual Beyond The Numbers report.

Inflation back below 5pc – but getting to 2-3pc remains a challenge

Annual inflation fell below 5 per cent in July and looks on track to hit 4 per cent or lower by the end of the year as 2022’s higher numbers drop out.

That reduces any urgency around further rate hikes – particularly since the fixed-rate cliff is now peaking, which effectively increases rates independent of the RBA.

However, the battle to get inflation back into the 2-3% band will still be a challenge next year and rate cuts seem a distance away, says our head of government bond strategies Tim Hext.

When Dr Michele Bullock takes over as RBA governor on September 18 she will be keen to establish her inflation credentials – so any move to a dovish outlook is unlikely, says Tim.

“For now, rates remain range-bound – as do risk markets,” he says.