The OCBC SME Index for the first quarter of 2025 (1Q 2025) contracted marginally to 49.9, slipping from 50.7 in the fourth quarter of 2024 (4Q 2024). This decline marks an entry into contractionary territory after three consecutive quarters of expansion, signalling a downward shift due to the weakening outlook which is now exacerbated by the US trade tariffs and uncertainties in global trade. Overall collections grew by 1.7% on-year, while payments remained flat with no increase.

The gross domestic product (GDP) Nowcast based on the OCBC Index for 1Q 2025 is 3.7%, down from the 5.0% registered in 4Q 2024. This is aligned to the 1Q 2025 GDP advance estimates released by the Ministry of Trade and Industry at 3.8%.

Following the 2 April announcement on the US tariff measures, the business outlook for SMEs is expected to weaken further in the quarters ahead. The dampening of trade flows on a global scale and subdued outlook on the US Dollar will likely impact local SMEs in the outward oriented sectors such as ICT, transport and logistics and wholesale trade. These industries have on average over 40% of collections accounted for by overseas customers, of which 7% are direct received from payers based in US. Majority of these overseas collections are also denominated in US Dollar.

The 1Q 2025 OCBC SME Business Outlook poll taken before the 2 April US tariffs did not reflect the concerns of SME business owners that have emerged since then. The sentiments of the 1,000 SME business owners in this survey remained largely unchanged from the previous quarter. 41% of the respondents felt business conditions were the same, with 36% seeing improvements and 23% noting a deterioration. Across industries, responses were the most downbeat for business owners from the education, retail and food and beverage (F&B). Close to 3 in 4 of SME business owners in these consumer-facing industries saw no improvements or worsening business performance over the last three months, with the remaining reporting an improvement in business. Among the export-oriented industries, over 60% of business owners saw no improvements or worsening business performance over the quarter. As the trade environment remains volatile and tariff measures imposed by major economies continue to evolve, business owners’ sentiments are likely to shift in the coming months.

The ongoing disruption in global trade flows and the reconfiguration of supply chains have left over one in four business owners identifying geopolitical uncertainties and market competition as the biggest challenge to their companies in the next six months. Business owners from the transport and logistics, business services and wholesale trade industries have indicated that they will be most affected by these factors moving forward. While larger macroeconomic pressures have overshadowed domestic concerns this quarter, the imposition of trade barriers and tariffs is likely to exacerbate inflationary pressures for local SMEs. In 1Q 2025, SMEs experienced an average wage bill increase of 9.7%, with sectors like transport and logistics, healthcare, and business services witnessing even steeper wage growth of over 15%.

The OCBC SME Index was weighed down by weaknesses in both externally oriented and domestic industries. Manufacturing contracted to 49.8 this quarter, with the fall in reading primarily attributed to weakness in the precision engineering (49.6) and consumer products (49.6) segments. Meanwhile, SMEs in electronics and semiconductors (50.7) saw a healthy pace of growth, with businesses benefitting from resilient external demand in the past quarter. Collections and payments for the segment increased 37.1% on-year and 18.9% on-year respectively, driven by strong growth in overseas collections and payments.

Against the uncertain economic backdrop and trade environment, performance of the manufacturing industry is expected to be negatively impacted in the medium term, especially so for those embedded in global value chains.

Transport and logistics reversed its upward growth trajectory and deteriorated to 49.5 in 1Q 2025, down from the 51.7 registered last quarter. This was accompanied by a 0.9% on-year increase in collections and 0.8% on-year drop in payments. While overseas collections rose by 3.1% on-year, overseas payments saw a drop of 2.4% on-year.

The reversal in trend can be attributed to weakness in the sea transport (48.8) and land transport (49.3). SMEs in both segments are likely affected by weaker global trade and stronger economic headwinds over the next quarter.

ICT remains in contractionary territory at 49.2, marking the industry's 11th consecutive quarter in contraction. The overall reading was weighed down by a slower pace of growth in the data processing and software development (49.3) and the IT consultancy (49.4) segment. As a significant share of the industry’s collections comes from overseas customers, businesses are likely to be adversely affected by the tariff measures imposed moving ahead.

Healthcare flat lined at 49.8 this quarter and stayed in contraction, even as collections and payments rose by 3.8% and 4.0% on-year respectively. Weakness in the healthcare distributors segment (48.9) posed a drag on overall growth of the industry with SMEs in the segment registering a 5.8% decline in collections. Manpower-related issues continue to be a key concern faced by businesses in the healthcare industry, with SMEs registering a 15.5% increase in wage bill in 1Q 2025.

Business services slowed to 49.6 in 1Q 2025, down from the 50.0 recorded last quarter. This was accompanied by a sizeable drop in collections and payments at 15.1% and 15.9% respectively. Based on the OCBC Business Outlook poll, only 29% of respondents cited an improvement in business conditions over the last three months, lower than the overall proportion of 36%. Similar to the previous quarter, expansions in advertising and exhibition, and accounting and legal were outweighed by weaknesses in the business consultancy segment which contracted at 49.0 this quarter.

Food and beverage softened to 49.6 this quarter, a sizeable decline from the 51.1 registered in 4Q 2024. Overall growth was dampened by a slowdown in the F&B services (48.3) segment, as collections and payments fell by 1.7% on-year and 0.9% on-year respectively.

Meanwhile, F&B wholesale trade grew at a healthy pace with a reading of 51.8, accompanied by a 17.4% increase in collections and a 17.6% increase in payments year-on-year.

Based on the OCBC Business Outlook poll, one in five of the F&B business owners are expecting conditions to worsen in the near-term. Performance of the industry could weaken further given that consumers may turn more cautious in terms of domestic spending. Education dipped to 49.6 this quarter and fell into the contraction territory after four consecutive quarters of expansion. This was led by a 3.0% increase in collections and 2.0% fall in payments. In line with the weaker business activity, 32% of respondents from the OCBC Business Outlook poll cited a worsening in company performance as compared to three months ago.

Overall performance in the industry was hampered by weaknesses in the formal education and commercial schools (47.5) segments, which has been on a downward trend over the recent quarters. Building and construction fell to 49.5 this quarter, down from the 50.2 registered in 4Q 2024. This is led by a contraction in the construction (49.4) and investment companies and operators (49.8) segment. While the anticipated wave of interest rate cuts was supposed to improve liquidity conditions for SMEs in the industry, the imposition of tariffs measures would potentially drive inflationary pressures up and make the operating environment more challenging for businesses.

Looking ahead, the OCBC SME Index is likely to ease further as SMEs grapple with new global trade norms and lower business confidence.

Trump’s imposition of blanket tariff rates on all imports into the US, followed by China’s tit-for-tat strategy, has intensified US-China trade tensions. This has also injected greater instability to the rules-based multilateral trading system and more disruptions could unfold in the coming months. The resulting shifts in supply chains and shipping routes are likely to have a direct impact on business activity of SMEs in externally oriented sectors such as manufacturing, ICT, transport and logistics, and wholesale trade. On the domestic front, the new tariff policy will also impose higher cost and inflationary pressures on local businesses. Coupled with a potential fall in demand from the US market, this would slow growth and dampen consumer spending. Businesses may consequently face challenges in maintaining their competitiveness and find themselves operating in a much more cautious business environment.

New global trade norms have called for a greater need for regional collaboration. The integration of ASEAN economies is key to sustain industries involved in cross-border commerce and trading activities. The new Johor-Singapore Special Economic Zone and the RapidTransit System (RTS) Link project could help enhance connectivity and spur new business ventures amongst enterprises across the neighboring borders. Digital trade platforms also enable SMEs to expand their international market access cost-effectively.

With the rise in sustainability trends, enterprises are now able to gain access to more green financing and ESG incentives. Close to one in four of the respondents in the OCBC SME Business Outlook poll are taking steps to improve their current sustainability practices, or already have sustainability practices in place. The increase in focus on sustainable development will provide more growth opportunities for SMEs in the construction, real estate or energy sectors, not only a differentiating factor for large organisations.

Re-disseminated by The Asian Banker