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The latest CreditorWatch Business Risk Index has revealed that business insolvencies are set to rise across the year whilst court actions also saw a massive surge as the economy moves through the impacts of the omicron wave.
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Business insolvencies set to rise as court actions jump 58%
10 February 2022
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10 minute read
CreditorWatch has launched its latest Business Risk Index (BRI) reflecting on January’s business activity. The latest results paint a grim picture, revealing that the Australian economy has some way to go before it shakes off the impacts of the pandemic.
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Among the dire results were court actions jumping a massive 58 per cent over the last quarter compared to the corresponding period last year, which is a return to pre-COVID levels and a strong indication that large creditors such as the banks and ATO have resumed regular collection activities.
This figure alone signals that business insolvencies will steadily increase across 2022.
The national probability of default remains flat at 5.7 per cent, against 5.8 per cent in December. While recognising this metric moves within a narrow range, the report highlighted that the January result is the highest in more than three years.
“Lockdowns in 2020 and 2021, particularly in Victoria and New South Wales, already had many businesses on their knees and it seems the spread of Omicron was the coup de grace for a number of those,” CreditorWatch said.
“Furthermore, CreditorWatch’s data showed that trade receivables continue to decline dramatically, down 45 per cent last quarter compared to the corresponding period last year and around 50 per cent lower than pre-COVID levels.
“As expected, January trade activity was weak following a dismal Christmas trading result. This sustained decline in cashflow will be a key driver of insolvency risk across the economy throughout 2022.”
External administrations for the quarter were up 7 per cent on the same quarter last year.
The January Business Risk Index released also included a state-by-state analysis on defaults, with the best and worst-performing local government areas. Western Australia was the best performer with Victoria and NSW struggling to recover from their protracted periods of lockdown last year.
“The continuing slide in the value of trade receivables is a worrying trend,” CreditorWatch chief executive Patrick Coghlan said.
“The RBA’s view last week was that Omicron hadn’t derailed the economic recovery and when case numbers go down, the floodgates will open and consumers will rush out and start spending this $200 billion hoard of cash.
“I’d love that to happen so businesses can get back on their feet more quickly, but there are a lot of ‘ifs’ about that assumption. Pressure is mounting for interest rates to rise. If that happens, it will be another hit to small businesses. CreditorWatch is expecting business insolvencies to grow steadily this year, even if the RBA doesn’t hike interest rates.”
Meanwhile, the boost in trading activity anticipated for the holiday season was dimmed by the arrival of the omicron variant in the first week of December, according to the report.
The number of credit inquiries has been trending down since July 2021. Following a lift in November, inquiries have fallen away heavily, precisely the opposite of what was expected.
This finding is consistent with messaging from the RBA that it has no short-term plans to hike rates although pressure is mounting, with the futures market having priced in a rise in May.
“The summer of 2021/22 was so full of promise, but Omicron came along in the first week of December and it all evaporated,” Mr Coghan added.
“There are some signs of economic and credit normalisation in the latest CreditorWatch results – external administrations being one example. Ultimately, though, CreditWatch’s data points to Australia’s economic activity running at a much slower rate than desired. We are in for a bumpy ride, which creates the biggest challenge for SMEs – uncertainty.”
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