The latest data from the May 2023 CreditorWatch Business Risk Index (BRI) paints a concerning picture for Australian businesses.
Multiple key indicators, including external administrations, B2B trade payment defaults, court actions, and credit enquiries, are showing significant upward trends. These mounting business risks can be attributed to factors such as increasing interest rates, high inflation, declining demand, and a drop in forward orders.
According to Anneke Thompson, Chief Economist at CreditorWatch, the Reserve Bank of Australia (RBA) is unlikely to consider reducing interest rates until at least mid-2024 due to persistently high core inflation levels. The BRI findings align with other economic indicators, such as the NAB Business Confidence Index, which indicates a notable decline in trading conditions.
On a regional level, the Business Risk Index data from the past 12 months highlights three adjacent regions—Wyong, Gosford, and Lower Hunter—as experiencing the most significant declines in the index. These regions face heightened risks of insolvency.
Key insights from the May Business Risk Index include:
- External administrations have seen a 35 per cent year-on-year increase after a seasonal dip between March and April.
- Court actions have risen by 50 per cent year-on-year after a temporary decrease in March.
- Credit enquiries have surged by 85 per cent year-on-year as businesses exercise caution regarding the financial health of their trading partners and tighten their credit policies.
- B2B trade payment defaults have risen by 31 per cent year-on-year, with the Food and Beverage Services industry standing out as having the highest probability of default.
- Merrylands-Guildford and Canterbury in Western Sydney remain the regions with the highest default rates in Australia.
- Casey-South in Victoria has entered the top 10 worst-performing regions for the first time, projecting a 7.00 per cent default rate over the next 12 months.
- Unley in South Australia holds the lowest risk of insolvency among regions with over 5,000 businesses, followed by Norwood-Payneham-St Peters, also in South Australia.
- External administrations in the construction industry continue to rise, reaching their highest point since June 2020.
- External administrations in the Healthcare and Social Assistance sector have more than doubled over the past year, although they remain relatively low.
Patrick Coghlan, CEO of CreditorWatch, eemphasisesthat businesses across nearly all industries are facing mounting pressures. He advises businesses to conduct thorough due diligence on their trading partners and regularly monitor them to avoid becoming unfortunate statistics.
Anneke Thompson underscores the increasingly challenging trading conditions for Australian businesses. Inflation and unemployment data suggest that further interest rate hikes are imminent, which will negatively impact businesses. Thompson believes that a decrease in the cash rate is unlikely until at least mid-2024.
Regions with a higher median age and individuals with minimal or no debt are experiencing fewer adverse effects from the RBA’s tightening monetary policy. Conversely, regions with a lower median age and individuals in earlier stages of their debt journey are encountering greater challenges. Rising interest rates are placing significant burdens on business owners in these areas.
The number of external administrations continues to rise due to difficult trading conditions and the lower-than-usual numbers observed during the pandemic.
Looking ahead, the upcoming financial year is expected to present significant challenges for Australian businesses, particularly those in the food and accommodation, tourism, and retail sectors. The decrease in overseas visitors, coupled with global interest rate increases, will likely hinder recovery in these industries. The upcoming Christmas period, traditionally a prosperous time for retail, is anticipated to be one of the weakest in history. While unemployment remains low, businesses are likely to reduce their workforce as trade slows down and costs rise.
The industries with the highest probability of default over the next 12 months are Food and Beverage Services, Arts and Recreation Services, and Transport, Postal, and Warehousing. On the other hand, Health Care and Social Assistance, Agriculture, Forestry and Fishing, and Wholesale Trade have the lowest probability of default.
Although the construction sector often garners attention for insolvency cases, the food and beverage sector actually exhibits the highest insolvency rate in the country. These smaller businesses face challenges such as high supply and labour costs, as well as customers tightening their spending.
Analyzing the worst-performing regions in Australia reveals that adjacent regions—Gosford, Wyong, and Lower Hunter—demonstrate high levels of personal insolvency. These areas also have higher levels of debt, making rising interest rates disproportionately affect them. Limited employment opportunities, in comparison to metropolitan regions, further hinder workers’ ability to secure pay raises. The nearby major city of Newcastle also struggles with high commercial rental and property costs.
Looking ahead, insolvency levels are expected to continue rising, particularly as the new financial year begins and businesses face reduced revenue forecasts. The decline in job advertisements compared to the previous year is anticipated to persist, leading to increased cost-cutting measures as unemployment rates rise.
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