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Business activity below pre-pandemic levels and rising payment defaults paint a gloomy picture, according to CreditorWatch.
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Key business data points to ‘sharp rise in company collapses’
18 October 2023
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10 minute read
A slump in business activity to well below pre-COVID-19 levels and an increase in payment defaults will trigger a “sharp rise” in company collapses over the next 12 months, according to the latest data from CreditorWatch.
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Key indicators in its Business Risk Index for September paint a gloomy picture for business and CreditorWatch CEO Patrick Coghlan said conditions remained challenging despite inflation easing.
“Rents, energy prices and the cost of services are keeping the heat in inflation but it’s encouraging to see some of the other drivers normalising,” he said. “However, our forecast is still for the business failure rate to increase over the next 12 months.”
CreditorWatch said the average value of invoices was a critical metric for business health because it impacted companies along the supply chain in multiple industries.
The average value of invoices had dropped 42 per cent over the past 12 months and “persistently low consumer demand” during high inflation meant the downward trend evident since 2019 showed little sign of reversing.
B2B trade payment defaults – a key predictor of future business failures – also continued to trend upward with a 57 per cent year-on-year increase while the national business failure rate would increase from the current rate of 4.5 per cent to 5.8 per cent over the next 12 months.
“The challenging operating environment means that we are forecasting a sharp rise in the business failure rate over the next 12 months,” it said.
“While high interest rates and reduced consumer spending are playing a large part in this, tax debts are also an important factor. Many businesses took the opportunity during the pandemic to defer tax bills. Many of these are now due, and the ATO is taking a more hard-line approach to collecting these debts.”
The industries with the highest probability of business failure over the next 12 months were food and beverage services (6.8 per cent), transport, postal and warehousing (4.5 per cent) and arts and recreation services (4.4 per cent).
“Cafes and restaurants need to order food daily and therefore price rises can be passed on to them very quickly,” CreditorWatch said. “The transport, postal and warehousing sector is also proving riskier as the surge of online shopping over lockdown periods has eased dramatically. Newer businesses that were opened in response to this surge in logistics demand will be finding operating conditions now much more challenging.”
The September data also highlighted the nation’s most vulnerable ventures were concentrated in Western Sydney, which had eight of the top 20 regions most prone to business collapse and 16 of the worst-performing regions in NSW.
“This region is very sensitive to interest rate changes, given the relatively high levels of debt among both businesses and households, and lower than average incomes,” CreditorWatch said.
“Consumers in Western Sydney are far more likely than the average consumer to be reducing their discretionary spending and this has flow-on effects for businesses.”
“These areas have a higher proportion of businesses that are in more risky industries, such as transport, postal and warehousing. Given the general younger age of the population, the businesses in this area tend to be younger as well, and thus more likely to have higher levels of debt and lower levels of cash reserves than average.”
CreditorWatch chief economist Anneke Thompson said conditions for small businesses, which were more sensitive to declines in consumer spending, would remain subdued until at least mid-2024 when rate cuts were expected.
“However, until then, large tax bills, rising insurance premiums, depressed consumer spending and high debt repayments are all issues that will be very confronting for some businesses and, in some cases, insurmountable.
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