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Australian businesses drowning in debt as insolvencies surge

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Australian businesses are bracing for a brutal economic storm, with a new report painting a grim picture of rising insolvencies, record payment defaults, and a dwindling consumer base. 

The latest Business Risk Index from credit reporting bureau CreditorWatch reveals a confluence of factors pushing companies to the brink.

Record-Breaking Insolvencies: The May report exposes a worrying trend: a staggering 38% year-on-year increase in the average insolvency rate across all industries. This translates to a 34% rise in the total number of businesses collapsing compared to last year, and a concerning 41% jump above pre-pandemic levels.

“Consumers at all income levels have been forced to cut back on spending due to multiple interest rate hikes and stubbornly high inflation,” says CreditorWatch CEO Patrick Coghlan. “This trend is now flowing through to businesses,with a significant rise in late payments, court actions, and ultimately, business failures.”

Industries Feeling the Pinch

The pain isn’t evenly distributed across sectors. The Electricity, Gas, Water, and Waste Services industry saw the sharpest rise in insolvencies, with a concerning 89% year-on-year increase. Education and Training (up 87%) and Mining (up 72%) also saw significant jumps.

The Food and Beverage Services industry emerged as the most vulnerable, with a 7.54% failure rate. Construction,meanwhile, faces the highest proportion of late payments, with over 10% of businesses having invoices outstanding for more than 60 days.

Limited Relief on the Horizon

While tax cuts are expected next month, economists at CreditorWatch predict a challenging remainder of 2024 for businesses. Interest rates are unlikely to fall before year-end, and consumer spending remains focused on essentials.

“With record high trade payment defaults, it’s clear businesses are facing increasing cash flow problems,” says CreditorWatch Chief Economist Anneke Thompson. “The outlook suggests some of the hardest trading conditions in recent memory, with insolvency rates likely to climb further before any potential relief from the RBA.”

Regional Disparity

Patrick Coghlan, CEO of CreditorWatch, attributes these deteriorations to the impact of cost-of-living pressures on consumers. He anticipates that consumer confidence will not recover meaningfully until the effects of at least two rate cuts are felt, expected well into 2025. However, he notes that upcoming tax cuts may provide some relief.

Anneke Thompson, CreditorWatch’s Chief Economist, highlights the increasing cash flow problems within the Australian business sector, pointing to rising late payment rates, court actions, business failures, and insolvencies as indicators of financial stress. Despite income tax cuts taking effect in July 2024, Thompson predicts a challenging remainder of the year for businesses, with high interest rates and constrained consumer spending.

Business Risk Index Highlights for May

Highest Business Failure Rates:

Food and Beverage Services: 7.54%

Administrative and Support Services: 5.43%

Arts and Recreation Services: 5.40%

Lowest Business Failure Rates:

Agriculture, Forestry, and Fishing: 3.27%

Health Care and Social Assistance: 3.74%

Financial and Insurance Services: 3.93%

Top-Ranked Region for Business Failure Risk: Bringelly-Green Valley, NSW, with a 7.53% chance of default.

Best Performing Regions: Concentrated around regional Victoria, inner Adelaide, and North Queensland, with Norwood-Payneham-St Peters, SA, as the top-ranked region.

The report also highlights regional disparities in business health. Areas with a higher proportion of older businesses and residents, like Adelaide City, fared better. Conversely, regions around Western Sydney and South-East Queensland showed higher risks of business failure. This highlights the uneven impact of the economic downturn across the country.

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