Business activity hits 7-year low, key indicators tumble
The latest data from CreditorWatch predicts rising insolvency rates over the next year, with food and beverage companies most at risk.
Business activity has hit a seven-low with the average value of B2B invoices down 36 per cent, the latest data from CreditorWatch shows.
The bureau’s August Business Risk Index revealed businesses were ordering less as cost pressures bite while other key indicators of economic health fell to fresh depths.
External administrations were up 28 per cent year on year (their highest point since October 2015) and trade payment defaults, a leading indicator of future business failure, were up 30 per cent.
“I’m very sorry to say that we’re far from the peak of business failures.”
CreditorWatch predicted the national business failure rate to rise from 4.54 per cent to 5.76 per cent over the next year, with food and beverage services companies most at risk “by a considerable margin”.
At the same time, external administrations in the construction industry had been consistently trending upward since May 2021 and were now above pre-COVID-19 levels.
The regions with the highest insolvency risk were clustered around Western Sydney and South-East Queensland.
CreditorWatch chief economist Anneke Thompson said tighter monetary settings were reducing both consumer and business demand.
“This, in turn, is driving inflation down,” Ms Thompson said. “The unfortunate reality is that this will also result in business failures, particularly for those businesses that were already only marginally profitable when interest rate settings were low.”
This was reflected in CreditorWatch’s Trade Payments Default Index, which showed businesses were lodging defaults against their debtors at record rates.
“As the average size of invoices falls, it stands to reason that cash flow is also reducing among a growing cohort of businesses, and this is resulting in more late payment of invoices,” she said.
“This has a snowball effect as businesses that are being paid late are also at risk of becoming late payers themselves. The past few months’ worth of data tells us that this is already happening.”
Slower payments – and a tougher line by the ATO on overdue GST – meant an increased rate of business failures.
The industries with the highest probability of business failure over the next 12 months were food and beverage services at 6.96 per cent, transport, postal and warehousing at 4.48 per cent, and arts and recreation services at 4.43 per cent.
“The food and beverage services sector will continue to record business failures at a much higher rate than other industries due to the high-cost nature of running these businesses as well as slowing demand as discretionary spending declines,” CreditorWatch said.
“The transport, postal and warehousing sector is being impacted by a slowdown in online shopping growth. During the lockdown years of 2020 and 2021, there was an explosion in courier services opening, as demand for goods delivered to homes soared. A number of these services will now be competing for fewer deliveries, and we are seeing the impact on business failures.”
“It is highly likely that interest rates will stay at current settings until at least mid-2024. This means that consumers are going to continue slowing spending as they are forced to allocate a larger proportion of their income to interest payments and rent.
“For this reason, the business failure rate is only going to get higher, particularly in those areas with heavily leveraged households or those that pay high rents relative to their incomes.”
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