Small business is in recession, but no one cares, says EL Executive Demand Index

AUSTRALIAN executive employment has had its equal biggest fall in 12 months as banks continue to block business lending and economic growth sputters, according to the highly accurate indicator of Australian executive employment trends, the E.L Executive Demand Index.

The EL Index fell 6 percent in November, its lowest position in 2019.

Grant Montgomery, managing director of search firm EL Consult that publishes the EL Index, said, “Employment opportunities for executives fell heavily this month bottoming out the year in a clear warning call for Australia’s overall employment trends."

A fall in the index indicates a weakening within 3-9 months, he said.

“It has been a year of correction, with the Reserve Bank trying to chase after the economy to keep it moving by lowering rates, and at the same time trying to jawbone the economy higher by pleading with companies to lower their hurdle rates for new investment," Mr Montgomery said.

“But the real problem for is that small business, which accounts for 57 percent of Australia’s GDP, is being held in a massive credit squeeze. 

“Recent denials by ASIC and AFIC that the post Royal Commission new “responsible lending’ rules do not apply to business lending is as ignorant as it is wrong.

“The truth is that banks in their highly protected comfortable environment have never actually lent to business but have lent against property for business purposes," Mr Montgomery said.

“The distinction here means they have no skills or capacity to differentiate or assess a business loan outside the lien they put on a property. So as soon as the regulators bought in 'responsible' lending the banks naturally applied the higher interest cover rules.

“This is not how business works.

“If someone has a highly innovative piece of technology and wants to set up a business, they used to get bank funding by putting their house on the line. As a new business with a high potential has very little income on inception. 'responsible lending' means they can no longer get funding to start.

"Even existing businesses rarely have consistent week on week or year on year incomes and if they seek funds for a tight period such as during drought the banks have no ability to assess the risk outside of morphing the 'responsible' lending rules and consequently refusing to lend regardless of the backing security.

“The whole small business sector isn’t spending or investing money. Ill-conceived borrowing rules are affecting innovation and entrepreneurship and it represents around half of the Australian working population or more than 5 million people. It is very easy to see why there are very few pay rises and very little wages growth," he said.

"Maybe the Federal Government very recently was trying to address this and spark innovation lending by setting up a venture capital lending vehicle. They had to drag the banks kicking and screaming into it -- unlikely to change anything. Its initial funding by a pool of $200 million is totally inadequate and ultimately won’t work because, you guessed it, Australian banks have absolutely no skills outside of property lending. 

“December last year saw a large fall, through seasonal factors, so we are on tenterhooks to see if the same thing will be repeated this year.” 

The good news is that the information technology sector was the standout winner for the month, following on from two months of sizeable falls," according to Mr Montgomery.

“Spending on technology will continue to be the focus of cost-conscious business. What’s more technology, especially online spending has now captured more and more of the marketing budgets,"he said. 

“The shift to the cloud is a further growth example as more and more business ditch their own hard storage. The downside of IT spending is of course that it ultimately saves jobs and employment falls.

“Still many have being predicted a crisis but that is unlikely to occur unless technology reaches a pinnacle of development with every advancement possible completed. Not going to happen!" Mr Montgomery said.

All of the other sectors put in negative results, with Engineering registering the biggest loss. New South Wales was again the strongest state during the month, almost pulling off a positive result thanks to gains in IT and Management.

About the E.L Index
The E.L Index is a comprehensive monthly analysis of employment trends at executive level. An Australian analysis is produced in Sydney and an Asian analysis in Hong Kong and Singapore. The E.L Index has shown by two separate University studies to correlate strongly with general economic and business trends. It is featured by most of the major news services and is closely followed by government and central bank analysts. The E.L Index is actually a combined national index of all executive demand made up of five separate indices; E.L Finance Index, E.L IT Index, E.L Management Index, E.L Marketing Index and the E.L Engineering Index.

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