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With defaults trending back to pre-COVID-19 levels, new data has suggested that the rest of 2022 could see further softening in business confidence.
CreditorWatch’s Business Risk Index (BRI) for June 2022 has revealed that business conditions are beginning to turn, which in turn points to an increased risk for future business insolvencies.
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Trade payment defaults are up 18 per cent year-on-year, while court actions are at their highest rate since March 2020, which has been attributed to a return to regular collections activity by lenders’ post-pandemic-induced “loan holidays”.
According to CreditorWatch chief executive Patrick Coghlan, the June data indicated businesses “could be in for a softer second half of 2022”.
“We continue to see a disturbing rise in trade payment defaults, our leading indicator for future business insolvencies,” he shared.
Current economic conditions are especially concerning for the finance and insurance sector – an immediate flow-on effect of the immediate slowdown being seen across Australia’s housing market.
This is an area where CreditorWatch expects to see “immediate impact” in the coming months.
Financial and insurance services are facing a 4.5 per cent probability of default over the coming 12 months, while rental hiring and real estate services are facing a 4.3 per cent probability of default, based on 60-day payment arrears data.
This stands in stark contrast with the “modest” rate of slowing being seen in retail trade. According to the index, people are still eating out at restaurants, entertaining, and buying clothes.
But eventually, “the performance of housing flows through to the rest of the economy, and we will see more of this impact towards the end of 2022 when the big Christmas shopping season is upon us.
At present, the national default rate is sitting at a flat 5.8 per cent, but the index expects this rate to rise given the deteriorating economic outlook, which will see a rise in business insolvencies across the remainder of the year.
CreditorWatch has conceded that its own forecasts contain upside risk – “as we won’t see the full impact of interest rate rises, plus higher labour costs, until around October/November.”
Weighing in, the group’s chief economist, Anneke Thompson, said that while Australian businesses have been previously operating at record capacity levels and business conditions are still tracking better than the long-term average, it’s not set to last.
She warned that “businesses will be increasingly wary of their credit customers and their ability to pay going forward, even if no problems have arisen to this point.”
“Businesses in the growth phase, who require equity or debt for growth, may now see these lines of funding get increasingly more difficult to source,” Ms Thompson said.
The Business Risk Index has also revealed the regions where risk of default is expected to be highest over the next 12 months:
- Merrylands-Guildford (NSW): 7.78 per cent
- Canterbury (NSW): 7.55 per cent
- Surfers Paradise (Queensland): 7.49 per cent
- Auburn (NSW): 7.40 per cent
- Ormeau - Oxenford (Queensland): 7.32 per cent
In contrast, here are the regions where businesses are at least risk of default over the next 12 months:
- Cottesloe-Claremont (Western Australia): 4.91 per cent
- Adelaide City (South Australia): 4.96 per cent
- Yarra Ranges (Victoria): 5.01 per cent
- Ku-ring-gai (NSW): 5.02 per cent
- Chatswood-Lane Cove (NSW): 5.10 per cent
[Related: Insolvency rates slated to spike within flood-impacted NSW, QLD]
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