Westpac has announced the latest Westpac-Melbourne Institute SME Index has slipped into negative territory in June 2018 and is down 4.7% to 98.3.

The Index, which examines the economic health of Australian small and medium-sized enterprises (SMEs) shows the 2018-19 Federal Budget has done little to inspire broader SME confidence, with 63.9% of businesses stating they expect to see no impact on their performance over the next 12 months. This is compared to 55.6% following the 2017-18 Federal Budget. Additionally, less than a third of SMEs believe the Federal Budget will improve the Australian economy.

“Small business confidence in Australia has reverted back to 2017 levels. Despite an optimistic start to 2018 and some improvement in trading conditions, the pick-up has not been as strong as businesses expected. SMEs are also less positive about the near term outlook with the slightly negative mood overall considerably more downbeat than three months ago,” says Westpac senior economist Mathew Hassan.

“While it looks to have been relatively well-received, the Federal Budget boost has not been enough to offset the disappointment around trading conditions and continued pressures on SME profitability.”

However, the Index has revealed there has been a marginal uplift in business confidence among SMEs, increasing 0.7% from 97.6 in June 2017 and a strong improvement since the 83 read in June 2016.

“We are seeing increased business activity across Australia however this doesn’t appear to be translating into real profit. With increased competitive pressures, particularly in the Wholesale & Retail Trade sectors, businesses are finding it difficult to maintain margins,” says Westpac general manager of SME business banking Ganesh Chandrasekkar.

“In a continuation of themes from last year, we see SMEs focus on the bottom line, tightly managing expenses and variable cost, resulting in a greater portion of SMEs deciding to reduce rather than hire staff for the first time since June 2016. Despite the cautious outlook on future business conditions, we see businesses continue to make targeted investment in equipment and machinery.”

The latest reading of the Index shows that confidence in the Agriculture, Forestry & Fishing is the lowest across industries, as SMEs in this sector remain pessimistic about future conditions. Meanwhile confidence in Construction is the highest at the moment in stark contrast to 12-months ago when confidence in the Agriculture, Forestry & Fishing Industry was high and the Construction SME Index was just below neutral.

Across the major states, current business conditions appear most favourable in Victoria but Victorian SMEs are the least optimistic about future conditions, while all other states have a positive outlook.