Payment defaults paint a ‘worrying picture for cashflow’
Rising trade payment defaults and subdued consumer confidence is creating a period of increased business risk for some sectors, CreditorWatch warns.
CreditorWatch chief economist Anneke Thompson said the operating environment for Australian businesses will continue to show an elevated level of risk as Australia settles into a period of higher interest rates for the next 12 months.
“Anecdotal evidence suggests that households with a home loan or that are renting are feeling significant financial strain,” said Ms Thompson.
“Monetary policy impacts and the effects of consumers' dwindling cash reserves are definitely working their way through the economy.”
Despite the positive impact of population growth on the economy, Ms Thompson said retail trade volumes are still in retreat, highlighting just how much Australians have decreased their spending.
Trade payment defaults also continue to “paint a worrying picture of cashflow constraints” for small business, she said.
“The volume of trade payment defaults we have recorded over the past three months have been some of the highest on record, and there has been a noticeable increase in the trend since June 2022,” said Ms Thompson.
Consumer confidence also remains near recessionary levels, as cost-of-living pressures put the squeeze on spending.
“Consumer sentiment has never been this low for this long, which points to difficult times ahead for the retail sector,” said Ms Thompson.
“Unsurprisingly, business confidence is weakest in the retail sector, at -12 index points. In trend terms, business confidence remains at below average levels, although it did rise slightly in the July 2023 figures.”
The retail sector is one industry facing increased risk at the moment, according to the credit agency, with stories of insolvencies and business liquidations predicted to increase in the coming months.
“For furniture, electrical and appliance retailers, as well as residential construction wholesalers, conditions are very challenging, as consumers can quite easily tighten spending in these areas, and also did a lot of their household goods spending during the pandemic lockdown periods,” said Ms Thomspon.
“Low residential sales volumes and new dwelling completions are also weighing heavily on these sectors.”
The credit agency is predicting that the business failure rate will increase over the next year, jumping to 5.79 per cent.
“Unfortunately, the slowdown in economic activity is going to cause casualties, and we expect that the food and beverage sector will bear the greatest cost due to both the slowdown in discretionary spending and continued high input costs,” she said.
CreditorWatch chief executive Patrick Coghlan said as credit enquiries rise so too do the risks for lenders in this environment.
“Many Australian businesses are struggling with cash flow and seeking credit to grow as they grapple with high inflation, decreasing demand and declining forward orders,” said Mr Coghlan.
’To mitigate risk in this volatile economy, it is crucial for lenders to strengthen their credit modelling and credit scoring to ensure they have multi-layered visibility on their loan applicants.”
In the current environment, Mr Coghlan said it is crucial that lenders strengthen their credit modelling and credit scoring to ensure they have strong visibility on their loan applications.
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