Insolvencies trend upwards as business pressures intensify
Leading indicators show external administrations, payment defaults and court actions are all rising sharply, according to CreditorWatch.
Australian businesses are facing significant and increasing pressures as interest rates and inflation rise, demand decreases and forward orders decline, the latest CreditorWatch Business Index has indicated.
CreditorWatch chief executive Patrick Coghlan said there has been a clear upward trend in the rate of external administrations in almost all sectors, with mining one of the few exceptions.
The 35 per cent rise in external administrations is the result of the challenging trading conditions and the fact that there were lower than usual numbers during the pandemic, according to the credit agency.
Court actions are up 50 per cent year on year, while B2B payment defaults have increased 31 per cent year on year.
Food and beverage services remains the industry with the highest probability of default over the next 12 months. This is also the sector with the highest insolvency rate in the country. This was followed closely by construction.
"While the construction sector continues to gain the most media attention due to insolvencies, the food and beverage sector has the worse insolvency rate in the country,” said CreditorWatch.
“These businesses tend to be smaller so get less attention, but there are clearly challenging conditions as supply and labour costs are still high, and customers are tightening their belts.”
Trading conditions expected to worsen
CreditorWatch chief economist Anneke Thompson said trading conditions for businesses in Australia are becoming more challenging.
“The latest monthly inflation and unemployment data suggests that we will be hit with more rate rises in the coming months, adding to the challenge,” said Ms Thompson.
“Sentiment in the business community has shifted down now that it is clear that core inflation is proving hard to tame. It is now unlikely we will see any downward movement in the cash rate until mid-2024 at the earliest.”
The best performing regions in Australia, in terms of probability of business insolvency, continue to be areas that have an older median age of residents.
“People with little to no debt remain mostly unaffected by the RBA’s monetary policy tightening,” CreditorWatch said.
“In contrast, the worst performing locations have a lower median age and people in these areas are more likely to be in the earlier stages of their debt journey. Interest rate rises will be weighing heavily on these business owners.”
The new financial year will be a very challenging one for Australian businesses, particularly those in food and accommodation, tourism and retail, said Mr Thompson.
“Overseas visitor numbers are well down on pre-COVID levels and are unlikely to recover soon as most countries around the world are trying to tame inflation through interest rate rises,” she said.
“The Christmas period ahead, usually a boom time for the retail sector, is shaping up to be one of the weakest on record. While unemployment remains at near historic lows, it is likely that businesses will start to trim headcount in the coming months as trade slows and costs increase.”
CreditorWatch expects insolvency levels will continue to rise, particularly as the new financial year draws closer and many businesses confront a reduced revenue forecast in their new budgets.
“We already know that there are now fewer jobs being advertised than this time a year ago, and this trend is likely to continue,” said Ms Thompson.
“So far, most Australian employees have felt quite comfortable in their employment and therefore have been more confident to continue to spend and book holidays and tables at restaurants. As the unemployment rate inevitably moves higher however, this trend will reverse, and a lot more belt tightening will occur.”
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