The small and medium enterprise (SME) sector in Australia is experiencing a significant slowdown in employee growth, raising concerns about the sector's future sustainability. According to the latest SME Index by Employment Hero, the annual employee growth rate for SMEs in April 2024 plummeted to six per cent, marking a sharp decline from the previous year's rate of 11%.

The findings of the index underscore the challenges confronting SMEs, particularly in attracting and retaining talent amid a shifting economic landscape. In terms of geographical distribution, Victoria and the Australian Capital Territory reported the lowest annual employee growth rates at 5.6%, while South Australia recorded the highest growth rate at 8.4%.

However, the decline in employee growth is not the only pressing issue facing SMEs. The report also highlights the surge in wage growth, which it deems as unsustainable. Year-on-year wages have surged by 7.8%, with a month-on-month increase nearly doubling to 2.2% in April 2024. This upward trajectory has propelled the median hourly rate to $39.21, up from $38.34 in the previous month.

Eddie Kowalski, Senior Insights Manager at Employment Hero, cautioned that while higher wages can serve as an incentive to attract and retain talent, they also pose significant challenges for SMEs by increasing operational costs. "This is why it's important for decision-makers to explore avenues for supporting the SME sector, which is facing severe and ongoing challenges," Kowalski emphasized.

CEO and co-founder of Employment Hero, Ben Thompson, echoed these concerns, describing the SME sector as being at a "crossroads." Despite monthly growth persisting, the overall trend is downward, signaling potential challenges ahead. Thompson warned that if the decline in employee growth continues alongside rising wages and operational costs, numerous SMEs could face financial strain, jeopardizing their survival.

In response to these challenges, the Australian government recently announced a $641.4-million investment aimed at providing targeted support for small businesses in the 2024-25 budget. While this initiative offers much-needed assistance, Thompson stressed that it may not be sufficient to address the complex threats confronting SMEs.

"Policymakers and business leaders must navigate these complexities and implement robust support initiatives to sustain the vitality of the SME sector and ensure balanced economic growth," Thompson emphasized. He underscored the critical importance of the coming months in determining whether SMEs can adapt to these challenges or face the risk of closure.

As the SME sector grapples with declining employee growth rates and escalating operational costs, effective policy interventions and strategic support measures are essential to safeguarding the sector's resilience and fostering sustainable growth in the broader economy.