Australian Small Business Growth Slows As Interest Rate Rises And Fuel Prices Weigh On Economy According To Xero Report

Australia’s small business economy lost momentum in the June quarter, with sales growth easing as higher interest rates and elevated fuel prices flowed through to businesses and consumers.

New data from Xero’s Small Business Insights (XSBI) report found small business sales growth slowed to 6.5 per cent year-on-year in Q2 2026, down from 7.9 per cent in Q1 and below the historical average for the data series.

Sales were at their peak in April, rising 10.7 per cent year-on-year, before dropping to 4.0 per cent in May and 4.8 per cent in June.

Louise Southall, Economist at Xero, described the quarter as a shift towards a more uncertain second half.

“After a strong start to the year, pressure started to show in the small business economy in the June quarter. Consecutive interest rate rises and elevated fuel prices have taken the heat out of the economy,” Southall explained.

“Growth is still positive, but those macroeconomic pressures are now weighing on both consumer spending and business confidence.”

A two-speed economy takes shape

The data revealed a clear divide between industries tied to discretionary spending and those operating in resource-intensive sectors.

Mining recorded 14.0 per cent year-on-year growth, utilities came in at 13.1 per cent and construction posted 10.8 per cent. At the other end of the spectrum, hospitality managed just 2.1 per cent growth, retail recorded 3.4 per cent and arts and recreation came in at 3.5 per cent.

The gap between the two groups widened during the quarter, with the discretionary sectors bearing the brunt of tightening household budgets.

“We’re seeing a two-speed economy,” Southall observed. “Businesses exposed to discretionary consumer spending recorded the sharpest slowdowns in sales growth between the March and June quarters, as tighter household budgets impact small business sales.”

She added that mining, utilities and construction were “far less impacted, with continued outperformance likely driven by price impacts alongside genuine demand.”

The pattern aligns with broader macroeconomic trends in Australia, where consumers have pulled back spending on non-essential goods and services as the cumulative impact of interest rate rises erodes disposable incomes.

Hiring cools as businesses take a cautious approach

While sales continued to grow across the small business sector, the XSBI data points to a more measured approach to workforce expansion.

Jobs growth eased to 3.0 per cent year-on-year during the quarter, down from 3.3 per cent in Q1. June was the softest month for employment, with growth falling to 2.0 per cent year-on-year – the weakest monthly result of the year so far.

Wage growth also dipped, coming in at 2.4 per cent year-on-year, compared to 2.7 per cent in the previous quarter.

“Hiring is often one of the first decisions small business owners delay when uncertainty rises,” Southall remarked. “Jobs are still growing, but the softer June quarter result suggests businesses are thinking carefully before adding to headcount.”

The combination of slower wage growth and reduced hiring activity suggests small business owners are looking to manage costs and preserve cash flow amid an uncertain outlook.

Northern Territory and Queensland lead state performance

At a state and territory level, the Northern Territory – which is being reported in XSBI for the first time – recorded the highest sales growth nationally at 8.4 per cent year-on-year.

Queensland followed at 8.2 per cent, supported by continued activity in construction and mining. Both states and territories outpaced the national average of 6.5 per cent.

The ACT recorded the slowest growth at 3.4 per cent year-on-year.

Payment times improve, but seasonal factors at play

There was some positive news in the payment data, with small businesses waiting an average of 22.9 days for payment during the quarter. Late payments also improved to 6.0 days.

However, the report cautioned that these improvements largely follow typical end-of-financial-year payment patterns, where businesses tend to settle outstanding invoices before the close of the financial year, rather than signalling a structural improvement.

Australia’s slowdown mirrors global trends

The moderation in small business growth is not unique to Australia. New Zealand recorded 8.6 per cent year-on-year sales growth in the June quarter, largely driven by its agricultural sector.

Australia’s 6.5 per cent growth sat above the UK (3.6 per cent) and the US (4.0 per cent), with all four economies experiencing a similar easing in momentum as higher interest rates and global uncertainty weighed on business activity.

Uncertain second half ahead

Looking further ahead, Southall warned the outlook remains clouded.

“Wider economic forecasts line up with what we’re seeing: ongoing global uncertainty and the situation in the Middle East are likely to keep weighing on small business sales and hiring for the rest of the year,” she commented.

“For small business owners, it’s more important than ever that they stay close to their numbers.”

The data paints a picture of an economy where growth continues but is losing pace, with small business owners increasingly focused on managing risk rather than pursuing expansion as the year progresses.

Last Updated on July 31, 2026 by Nick Ross