Consumer pullback fuels record insolvency wave: CreditorWatch
The long-awaited cut back in spending has arrived and is hitting energy, education and mining businesses the hardest.
The pullback of consumer spending is hitting businesses hard, with insolvencies climbing record levels driven by collapses in the energy, education and mining industries.
The CreditorWatch Business Risk Index found a 38 per cent average increase in insolvencies in the year to May. The rate was up 34 per cent from last year and 41 per cent above its pre-COVID maximum.
CreditorWatch CEO Patrick Coghlan said interest rate hikes and stubbornly high inflation forced consumers at all income levels to cut back on spending.
“We don’t expect a meaningful turnaround in consumer confidence until the impact of at least two rate cuts has been felt, which won’t be until well into 2025,” he said.
“The only bright spot for households is next month’s tax cuts, although we don’t see much of this going to discretionary spending.”
Insolvencies increased 89 per cent year-on-year for businesses in electricity, gas, water and waste services, driven mostly by failures in small businesses.
This was followed by businesses in education and training (87 per cent), due to falling international student numbers, and mining (72 per cent).
Information, media and telecommunications was the only industry to see an improvement in the rate of insolvencies, with a drop of 2 per cent.
CreditorWatch said business payment defaults also “smashed” its previous record, up 21 per cent on April’s record (a 58 per cent year-on-year increase).
Chief economist Anneke Thompson said this pointed to businesses experiencing increasing cash flow problems.
“We have known for some time now that consumers have pulled back on spending quite dramatically as high interest rates and inflation smashed household budgets,” she said.
“This trend took some time to flow through to businesses but is now showing up in the data in the form of increasing late payment rates and rising court actions, as well as increased business failures and insolvencies.”
Thompson said the remainder of 2024 would likely be “extremely challenging” for businesses as interest rates were unlikely to fall before the end of the year, and money flowing through the economy is focused on non-discretionary goods and services.
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