Problems ahead for minnows

The growth of small businesses is starting to slip behind that of the wider economy, the National Bank says.

After two years of outpacing the national economy in average annual economic growth rates, firms with fewer than 20 employees have dropped to a rate of 4.4 per cent, below the national rate of 4.8 per cent.

The bank's Small Business Monitor for the December quarter, out today, says small to medium-sized enterprises are expected to keep trailing behind for the rest of the year.

National Bank economist Lauren Rosborough said small businesses did not need to think the worst.

"When we say underperform, we don't mean it's going to be dire for them. They're still going to be growing, just not as fast as they have in the past," she said.

"They just need to be extra vigilant and ready to act in response to changing economic forces."

Strong retail trade largely drove the sector's 0.6 per cent growth rate over the quarter and held it up relative to the economy, which grew at a slightly lower rate of 0.4 per cent.

The main reason small businesses were underperforming the economy as a whole in spite of having a higher quarterly growth rate was slackening demand in the construction industry.

Although construction activity had been contracting for the past two quarters economy-wide, driven by a slowing in the housing market, this had happened at a faster rate for small businesses, said Rosborough.

"Potentially, construction activity is going to continue to slow. There is a supply glut pending in the housing market and all those small construction firms are going to be struggling to find new jobs."

A stand-out finding of the monitor was that small businesses created 12,400 full-time equivalent jobs in the last year, representing one-third of total national employment growth for the period.

Growth in retail and service sector jobs was about half that figure.

Micro-sized firms - those with fewer than five employees - contributed 23 per cent of total employment growth of the whole economy.

"It is a large decision for micro-sized firms to employ a new person given they have so few employees to begin with.

"So gaining nearly a quarter of the economy's annual employment growth is, therefore, quite a remarkable feat," said Rosborough.

Twenty-three per cent of small business respondents to the bank's business outlook survey reported a lack of skilled staff as their greatest concern in the three months to March; it has been the biggest problem for five consecutive quarters.

Regulation was the second greatest concern, followed by taxation.