Business orders plummet as rate cycle bites
Order values have dropped to historic lows, CreditorWatch says, with conditions expected to deteriorate “even further” without relief from the RBA.
Business order values have plummeted to historic lows in a sign that businesses are enduring the monetary policy cycle’s toughest phase, according to data from CreditorWatch.
The credit reporting bureau’s latest Business Risk Index found businesses have halved their spending on inventory in the last six months, with order values down a record 49.9 per cent over the year to June.
It comes as payment invoice defaults sit well above pre-pandemic levels and have continued to trend upwards since the middle of 2021, indicating the growing difficulties of businesses in paying suppliers despite lower order values.
Chief executive Patrick Coghlan said the combination of declining order values and increasing payment defaults was a “major concern”.
“It indicates more businesses are experiencing both cost and demand pressures,” he said.
“With another rate increase becoming increasingly likely, we expect both metrics to deteriorate even further.”
CreditorWatch said small businesses and the hospitality industry were faring the worst, predicting failures in the hospitality sector to rise from 7.5 per cent to 9.1 per cent – or one in 11 businesses.
“It is small businesses that are hurting the most as they are more vulnerable to adverse economic conditions than larger businesses,” Coghlan said. “They operate on tighter margins and are less able to take measures to cut costs.”
The hospitality sector’s heavy reliance on discretionary spending meant it had a significantly higher failure rate forecast compared to other industries, CreditorWatch said.
The 9.1 per cent predicted failure rate was almost double the rates of other struggling sectors such as arts and recreation services (5.7 per cent) and transport, postal and warehousing (5.5 per cent). The average forecast for all industries was 5.1 per cent.
Court actions also surged, CreditorWatch found, increasing 37 per cent for the year to June and also sat well above pre-pandemic levels.
Food and beverage services were the top-ranked industry for outstanding ATO tax debts above $100,000, followed by construction and electricity, and gas, water and waste services.
Geographically, Western Sydney and South-East Queensland faced the highest risk of business failures, while businesses in regional Victoria, inner Adelaide, and North Queensland had the lowest risk.
Adelaide emerged as the best-performing capital city central business district.
Chief economist Anneke Thompson said the statistics showed businesses were enduring the toughest phase of the monetary policy cycle.
“The high cost of debt is compounding the problems wrought by inflation, that is still too high in some areas,” Thompson said.
“Monetary policy decisions usually lag what is happening in the broader economy, as data takes time to filter through to the RBA, and the RBA also wants to see a few months’ worth of data to be more certain that their decisions taken at board meetings are the correct ones.
“While this approach is sound theoretically, in practice it means businesses have to endure high interest rates long after consumer demand has plummeted, and discretionary spending has significantly weakened.”
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