A tale of two economies is unfolding in Australia. While big business is bouncing back, the struggles of smaller firms are casting a long shadow over the nation’s economic health.
New data released this week by credit bureau illion, as part of its Commercial Risk Barometer in Australia, reveals that economic green-shoots may be starting to appear as business failure risk improves slightly for larger businesses, but younger and smaller firms continue to struggle.
After an extended period of deterioration throughout 2023, the Australian economy is showing some hope that economic improvement is on the horizon, but it’s only for mature and larger businesses at this stage.
“While this is positive news for commerce generally, the small re-trace (1 per cent in the six months to June 2024) still has a long way to go, given the significant deterioration since the start of 2023 of 7 per cent. This means that business risk is only back to where it was in October 2023,” said Barrett Hasseldine, illion’s Head of Modelling.
“Australian business owners are looking for positive signals, and while this is one, we will still need to be cautious with our forecasts. While the trend may ultimately point to a long-term improvement in business risk, our optimism is slightly muted when considering the outlook for certain industries and business segments, as the risk trend is not uniform. This is shown in the differences by geography, business age, business size and industry,” he said.
illion’s Commercial Risk Barometer shows that the general improvement in business failure risk has been mainly led by larger and mature businesses, with these organisations improving at 10 times the rate of small businesses in Q2, 2024. Larger and more mature businesses may have firmer foundations such as a larger capital base, lower unit cost base, strong balance sheets and stronger brand presence, allowing them to withstand economic headwinds.
“Comparing businesses by their size, we can see from the data that the risk of those businesses employing fewer than 20 people, such as family businesses, improved by 1 per cent from April to June 2024, whereas it improved by 2 per cent for businesses employing up to 100 people, and by 10 per cent in those employing more than 100 people in the same period.
“Similarly, the risk of young businesses, operating less than five years, deteriorated by 7 per cent in the last quarter. In fact, only businesses operating for more than 20 years saw their risk improve below the level seen 18-months ago,” Barrett added.
By region
At a regional level there are differences in this improvement: “Victorian businesses are doing it tough, with the data showing the failure rate continuing to rise, while the rate in most other states appears to have turned around,” said Barrett.
“Based on the data, Victoria’s trend continues to worsen, other than for a brief spell post-Christmas. This may serve as a warning for business conditions in Victoria, as we head into 2025.
“South Australia has done particularity well; however, it still has a long way to go to recover from the sizeable deterioration it suffered up to March 2024 – it had the highest deterioration over the past 18 months. In New South Wales, the data shows there hasn’t been an improvement compared to the last quarter of 2023. That said, risk is not getting worse.
“Businesses in Queensland continue to operate with the best economic outlook, having both the lowest long-term rise in risk, 2.9 per cent higher in June 2024 than in January 2023, and a substantial improvement this year from April to June alone, down from 3.4 per cent higher at the end of March,” Barrett added.
Low consumer confidence pours doubt on sustained recovery
The ANZ-Roy Morgan Consumer Confidence Rating also shows that consumer confidence trends indicate economic headwinds may be returning as falling consumer confidence is having an adverse effect on some businesses. This may materialise as higher business risk by 2025, as consumer confidence is generally closely aligned with business confidence around 3-4 months later.
The dip in consumer confidence observed in the March quarter also coincides with some early indications of business stress in the education, training and financial services sectors (likely finance and insurance brokers). As well, the trading risk of the food services sector continues to deteriorate through 2024, while the Retail and Transport sectors remain vulnerable to economic problems. The Retail sector is especially noteworthy.
“Business trading has fallen below 2023 levels in retail, which is disappointing. Other than in June, due mainly to EOFY sales trading, the retail sector has fallen below 2023 levels in both Q1 and Q2 – 5 per cent lower in fact.
“This is a concerning result for the retail economy, especially when we also consider that the real contraction will be worse than 5 per cent due to rising inflation. Any predicted deterioration in business failure risk through 2024 and 2025 may therefore be particularly harmful to retail businesses.
In contrast to the above, the data suggests a green shoot is appearing in the construction sector, which has been hit hard over the past two years. It may finally be seeing some sort of turnaround as building activity rises.
“Growth in the construction sector is trending higher month-on-month, meaning that we may see a reversal in the two-tier economy in 2024/25, where the retail sector, food services and even smaller financial services businesses could falter, while construction may become Australia’s growth engine. The economies of scale seem to be shifting and for those sectors in trouble, we are looking at a tough period post-Christmas if things don’t change.
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