SMALL and medium-sized enterprises (SMEs) expect business outlook to brighten in the second and third quarters of this year as global economic conditions improve, but do not think this will translate into higher sales and profit as domestic concerns weigh in.

This was a finding in the latest survey by the Singapore Business Federation (SBF) and DP Information Group (DP Info), which delved into the sentiment of 3,000 business owners and managers for Q2 and Q3.

It found that SMEs' overall outlook rose three points to 55 from the previous survey released in January, which looked at sentiment for Q1 and Q2.

The improved reading comes as the US shows signs of recovery, Europe battles through its problems and China rebounds with slower growth.

Despite the raised optimism, SMEs lowered their expectations for their financial performance. The index score for turnover expectations fell to 5.36 from 5.44; profit expectations fell to 5.12 from 5.33.

Ho Meng Kit, CEO of SBF, said: "Inflation, high business costs and (the) tightened foreign worker policy continue to be a drag on businesses and the economy.

"Businesses are mindful that they need to urgently raise productivity through capital investment, as well as look to alternative markets to make up for the shortfall from traditional trading partners."

Another reason SMEs do not think they will perform better may be because they are not feeling the benefits of a slightly more stable global outlook.

Chen Yew Nah, managing director of DP Info, said: "It takes time for global economic changes to translate into sales and profits. That's why SMEs expect growth to be slower in the near future.

"However, SMEs are neither sitting around nor losing confidence. They are investing in capital equipment to drive productivity improvements in their businesses. Capital investments in technology and equipment increase efficiency and the output from each employee."

Capital investment expectations among SMEs rose to 5.23 from 5.16 despite the dimmer profit outlook, suggesting that SMEs understand they need to make productivity improvements now, said Ms Chen. "It is investment they can no longer put off."

There are, however, concerns over access to funding. SMEs expect it to be more difficult to borrow money in Q2 and Q3.

This feeling was shared most acutely by companies in the business services, manufacturing and transport/storage sectors. All three sectors saw their "access to funding" score dip into negative territory of below 5, which means they expect the situation to worsen in the next few months.

SBF and DP Info said: "If financing continues to tighten, it may slow the growth of SMEs in all sectors. The government may need to provide some impetus to financial institutions to co-fund the risks so that SMEs can stay adequately funded to continue their growth and expansion plans."