Revenue of small and medium-sized companies (SMEs) grows 7% in 2023

The Omie Index of Economic Performance of Small and Medium-sized Enterprises — SMEs (IODE-PMEs) — points out that the average real financial movement of Brazilian small and medium-sized enterprises (SMEs) showed growth of 7% in 2023 in the annual comparison. In the fourth quarter of 2023, the index showed an increase of 12.7% in the sector, compared to the same period of the previous year, after +8.4% in the third quarter.

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IODE-PMEs works as an economic thermometer for companies with revenues of up to R$50 million annually, consisting of monitoring 678 economic activities that make up four large sectors: Commerce, Industry, Infrastructure and Services. In general terms, the SME market showed a clearer growth trend from the second quarter of 2023 onwards.

According to the economist and manager of Indicators and Economic Studies at Omie, Felipe Beraldi, despite the maintenance of interest rates at historically high levels throughout the previous year – which discouraged consumption and investments –, SMEs were positively impacted by recovery of family income, reflecting the more favorable effects coming from the labor market. The unemployment rate reached a level below 8% during the fourth quarter of 2023, which had not occurred since the beginning of 2015.

The economist also assesses that income was also favored by several economic policy measures (such as the expansion of Bolsa Família and the real appreciation of the minimum wage) and by the greater inflationary control observed in the country – which has direct impacts on power of household purchases.

“In addition to this context, the normalization of global production chains – after the longer-lasting effects of the pandemic – also favored the performance of small industries”, he states.

Given this scenario, data from IODE-PMEs shows that the sector outperformed the country's overall GDP last year. According to the BCB's Focus Bulletin, the median market outlook for GDP in 2023 (the official closing of which will take place in March/) is at 2.9%, while SMEs ended the year with an expansion of 7%.

In the analysis by region, IODE-PMEs showed that the growth of SMEs in 2023 was spread throughout Brazil: Southeast (+6.3% compared to 2022), South (+5.3%), Northeast (+7.5 %), Central-West (+9.8%) and North (+21.3%) – the latter based on a significantly weak comparison base from the previous year.

The performance of IODE-PMEs in 2023 has very significant sectoral differences, with the positive result having been conditioned, especially, by activities in Industry and Services.

Industry SMEs

The main contributor to growth in the previous year was the industrial segment, in which IODE-PMEs showed a significant increase of 17% compared to 2022.

“Industrial SMEs embarked on a more robust recovery trajectory from the second half of 2023, after the challenging years of 2021 and 2022, a reflection of the recovery in domestic demand and the normalization of global production chains – which are reflected in a significant drop costs, especially for smaller industries. Thus, part of the recovery in Industry's real revenue reflects the loss of momentum in producer inflation (IPA-FGV), which registered a drop of 5.6% in the last 12 months”, says the economist.

In the sector, the activities that stood out the most in 2023 were: 'Manufacture of beverages', 'Manufacture of auto parts and road implements', 'Manufacture of clothing and accessories', 'Manufacture of machinery and equipment and 'Manufacture of food products '.

According to Beraldi, it is worth highlighting that the growth seen in the sector is spread across activities, considering that of the 23 subsectors of the manufacturing industry monitored by the index, 20 showed growth in 2023.

Service SMEs

IODE-PMEs indicates that Services SMEs also presented positive results in recent months (+9.8% YoY in 4Q2023), having ended the previous year with an increase of 4.4% compared to 2022. The recovery of the segment, including, contributed to the good results seen in the labor market, since most of the growth in the balance of formal workers was allocated to activities in the Services sector in 2023.

From the point of view of the most notable activities in the previous year, the following stand out: 'Accommodation and Food'; 'Administrative activities and complementary services' (such as travel agencies, tour operators, surveillance activities and office services); and 'Financial activities'.

Commerce SMEs

The index shows that there was a decline in the Commerce SME segments (-3.6% compared to 2022) in the previous year. The decline in the year was observed in a widespread manner, both in the retail segment (-6.2% YoY) and in the wholesale segment (-0.9%). In wholesale terms, the most recent data from IODE-PMEs already indicates a reaction, given the 3.7% growth seen in the fourth quarter of 2023 in annual terms.

In retail, recent results remained below expectations (-8.9% YoY in 4Q2023), including some disappointment surrounding the effects of the Black Friday and Christmas campaigns. Among the activities with the worst performance in 2023, it is worth mentioning 'Office equipment', 'Paints and painting materials', 'Lighting articles' and 'Telephone and communication equipment'.

“On the other hand, the positive evolution in segments highly dependent on the evolution of family income – such as food products and beverages – restricted a more abrupt fall in retail trade SMEs in the previous year”, says the economist.

Infrastructure SMEs

In the Infrastructure segment, in turn, the weak result in 2023 (-2.0%) was caused by the decline in activities of 'Infrastructure works' and 'Waste collection, treatment and disposal'. However, a recovery in IODE-Infraestrutura has already been observed recently, given the 4% growth in the fourth quarter of 2023 compared to the same period of the previous year, reflecting the positive performance of the 'Specialized services for construction' activities.

Projections indicate growth of SMEs in 2024

After ending 2023 with growth, the IODE-PMEs outlook indicates that the increase should continue in 2024, with a forecast of 3.1%. Also according to Felipe Beraldi, elements of the economic scenario that should enable continued advancement in the domestic market for small and medium-sized companies remain on the radar “even if projections indicate a certain loss of momentum compared to the performance seen in recent years”.

Despite the little space for new major contributions from the labor market (currently the unemployment rate is at 7.5%), the prospect of continued reduction in inflationary pressures in the country tends to positively affect the evolution of purchasing power of Brazilian families and, consequently, domestic demand.

“However, no major stimulus is expected from a fiscal point of view, given the need to adjust public accounts.
Additionally, the effect of reducing interest rates – a movement initiated by the Central Bank in August 2023 – should begin to become more evident in the real economy throughout the year, favoring an increase in consumption and investments”, he continues.

In general terms, the market expects the Selic's downward movement to continue in the short term, with a return to a single-digit rate by the end of 2024. The basic interest rate of the Brazilian economy started the year at 11.75 % (already 2 percentage points below the rate in force until mid-2023), with prospects pointing to the level of 9% by the end of the year.

Even though the Selic (base interest rate) is expected to remain at historically high levels (considering, especially the levels of 4% to 5% seen before the pandemic shock), data from the end of 2023 are already beginning to outline a reaction from concessions credit, both for individuals and companies. In this sense, in the coming months, the drop in interest rates should become more evident in the real economy.

“Thus, domestic conditions are favorable for SMEs, which should continue to show growth above the average performance expected for Brazilian GDP – currently between +1.5% and +2%. This positive performance of SMEs should be sustained by the continued growth of Services activities and, to a lesser extent, some industrial segments”, comments the economist.

Furthermore, the favorable context for the evolution of families' real income and the effects of falling interest rates should pave the way for the resumption of real revenue growth for Commerce SMEs, after a very challenging 2023.

The business environment is highly susceptible to shocks and, because of this, it is essential that entrepreneurs are aware of the evolution of the main external and internal market conditions in the coming months.

“In addition to monitoring geopolitical tensions around the world, monitoring the evolution of inflation and monetary policy in the USA (interest rate targets stipulated by the FED) is of great importance, given the significant consequences on the evolution of the economy of countries in development, like Brazil. Internally, the main risks in the short term are related to addressing fiscal issues (balance between government revenues and expenditures), which can significantly impact inflationary expectations and the evolution of interest rates in Brazil”, adds Beraldi.