The latest Xero Small Business Insights (XSBI) data shows just how challenging conditions became for small businesses, and their customers, towards the end of 2023. We’ve summarised the major trends and also have some tips for you on how to navigate the current headwinds.  

Despite improvements over the past year, inflation (or cost-of-living) pressures remained in late 2023. Prices were still rising faster than usual, especially in Australia (+4.1% year-on-year (y/y) in the December quarter), New Zealand (+4.7% y/y in the December quarter) and the UK (+4.2% y/y in January). Central banks have been trying to curb this by lifting interest rates over the past two years.

In response, economic growth has been slowing, albeit at different paces, in the countries that are in the XSBI program. These economic headwinds mean consumers do not have extra funds to spend in small businesses. Meanwhile, small businesses are trying to stay profitable in a climate where sales are slowing and costs are rising.   

Sales growth slows further as customer budgets remain under pressure

The extent to which consumers are cutting back spending in small businesses was clear in the latest XSBI data, which is to September for North America and December for the other three countries. In particular, small businesses in Australia, New Zealand and the UK had a soft festive season.  

In the US, sales fell an average of 4.9% y/y in the September quarter. Sales have been lower than the same month in the previous year for eight consecutive months. 

In Canada, sales fell an average of 5.0% y/y in the September quarter. Sales have been lower than the same month in the previous year for six consecutive months. 

In Australia, sales rose 5.1% y/y in the December quarter. However, this was largely due to a 10.1% y/y rise in October. November (+4.3% y/y) and December (+0.9% y/y) were both much softer. The December result is the smallest rise in sales since January 2021.

In New Zealand, sales fell an average of 0.3% y/y in the December quarter, including a 1.9% fall in the month of December.

In the UK, sales grew an average of just 1.6% y/y in the December quarter, including a 1.0% y/y fall in December – the first monthly decline since February 2021.

Tip for your business: Think about ways to attract increasingly scarce customers to support sales. This might include rewarding loyalty or leveraging the close relationships you have built-up with customers.

Small businesses not keeping up with big business wage rises

Meanwhile, in an effort to stay profitable, small businesses are paying smaller wage rises than the national average. This is due to high inflation continuing to put pressure on many costs associated with running a business.

In Australia, wages growth, when looked at in quarters, appears little changed. It averaged 2.8% y/y in the September quarter and 3.0% y/y in the December quarter. Like sales, the softness was largely in December — when wages rose just 2.5% y/y. In contrast, data from the Australian Bureau of Statistics shows private sector wages in the whole economy rose a much larger 4.2% y/y in the December quarter.

In New Zealand, wages growth slowed to 2.8% y/y in the December quarter, down from 3.4% y/y in the September quarter. This is the smallest quarterly wage rise since the September quarter 2020. Meanwhile, data from Stats NZ shows private sector wages in the whole economy rose 3.9% y/y in the December quarter.

In the UK, wages rose an average of 3.2% y/y in the three months to December, but just 2.6% y/y in the month of December. This compares to economy-wide data from the Office of National Statistics which shows wages rose 6.2% y/y in the three months to December.

Tip for your business: Think about non-wage strategies you could use to keep or attract staff such as supporting them to learn new skills.

Beating inflation and lower interest rates key to turning the corner

Looking ahead, there’s unlikely to be a significant improvement in conditions until inflation is back under control and central banks are confident enough that they can start cutting interest rates without re-igniting it. North America has made the largest inroads into getting inflation back under control (US CPI +3.1% y/y & Canada CPI +2.9% y/y in January). Unfortunately, the first round of central bank meetings for 2024 all had a common theme: they are happy with recent inflation outcomes but remain concerned it could break-out again, so are not yet ready to start cutting rates.

If you’re interested in finding out more about how small businesses are performing visit Xero Small Business Insights for more data and analysis.

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