Sharp rise in business failures expected: CreditorWatch

According to the September 2023 CreditorWatch Business Risk Index (BRI), released today (18 October), the national probability of business failure over the next 12 months (either through a liquidation event, ASIC strike-off of the company or deregistration) has risen from 4.54 per cent to 5.76 per cent.

The report outlined that the “challenging operating environment” has placed additional strain on Australian businesses, with the ratings agency suggesting that “high-interest rates and reduced consumer spending are playing a large part” in the increasing risk of failure, as are tax debts.

The group explained: “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.”

Businesses in the food and beverage services sector remain the most at risk of payment defaults (6.8 per cent) by a considerable margin, with CreditorWatch noting that the higher failure rate can be attributed to the fact that these businesses tend to pay high rents and have input costs that can increase quickly and frequently.

“Cafes and restaurants need to order food daily, and therefore price rises can be passed on to them very quickly,” it said.

The food and beverage industry also tops the list for external administrations (followed by the construction industry, where forward-work orders are diminishing and insurance costs are rising).

Transport, postal and warehousing was the next “riskiest” industry of failure, at 4.5 per cent, with the group noting that 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,” it said.

Arts and recreation services rounded out the top three sectors at high risk of failure, at 4.36 per cent.

In terms of geography, the highly indebted areas of Western Sydney and South-East Queensland feature heavily in the top 10 riskiest regions in the country.

Western Sydney regions made up eight of the top 20 regions in Australia most at risk of business failure – with Merrylands – Guildford having the highest default rate for the next 12 months (7.77 per cent).

Moreover, at a state level, 16 of the 20 worst-performing regions in NSW were also found to be in Western Sydney.

According to CreditorWatch, 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.

It added that these areas have a higher proportion of businesses that are in more “risky” industries, such as transport, postal and warehousing.

“Given the generally 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,” the group added.

“Consumers in these areas are also pulling back on discretionary spending harder than in other areas of the country, given the relatively low ranking on the Index of Relative Social Advantage,” flagging that this has a flow-on effect for businesses in the area.

Conversely, Adelaide CBD continues to be the only central business district to feature in the top 10 best-performing regions in the country.

This is because retail spending has held up better in Adelaide as households have less debt on average than their eastern seaboard counterparts and rents are also cheaper than in Sydney, Melbourne and Brisbane, CreditorWatch found.

Another two regions in inner Adelaide, Unley and Norwood-Payneham-St Peters, feature in our top 10 areas with the least risk of business failure.

The industries with the lowest probability of default over the next 12 months are healthcare and social assistance (3.15 per cent); wholesale trade (3.35 per cent) and agriculture, forestry and fishing (3.43 per cent).

Several of these sectors have support from government, or – where demand remains high – are more able to pass these on.

Noting the trends, CreditorWatch said that the business operating environment will “still be challenging for at least the next year” – given the “very confronting” and, for some businesses, “insurmountable” burden of large tax bills, rising insurance premiums, depressed consumer spending and high debt repayment.

CreditorWatch chief executive Patrick Coghlan said easing inflation was a positive sign for business activity going into 2024, but conditions remained challenging.

“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. However, our forecast is still for the business failure rate to increase over the next 12 months,” Mr Coghlan said.

CreditorWatch’s chief economist Anneke Thompson added that business conditions, particularly among small businesses that are more sensitive to drops in consumer spending, were likely to remain subdued until the middle of next year, when cuts to the cash rate are forecast.

“By mid-2024, we should have some reasons to believe that the cash rate will soon fall, and this will give many businesses (and consumers) more confidence to spend and invest,” she said.

The CreditorWatch Business Risk Index echoed similar concerns raised by the Deloitte Access Economics Business Outlook.

According to the September 2023 edition of the report, Australia needs to rapidly incentivise the rebuilding of investment to drive productivity and prosperity.

It found that Australia’s economy “remains on a knife edge”, with the country currently in a retail recession and a per capita income recession.

Deloitte Access Economics partner and report author David Rumbens commented: “The retail sector knows about it – trend retail growth of just 1.3 per cent is the lowest trend growth recorded since 1982, just before Australia won the America’s Cup. Consumer confidence remains extremely fragile, near its all-time low point. Business failures have also been on the rise through 2023, centred on construction but also affecting accommodation and food services, manufacturing and retail trade.

“However, a shaken-up Australian economy must not only deal with the cost-of-living crisis of today but also with helping Australia’s business sector look to 2024 as a year for growth.

“The business cycle will soon be past its low point and start turning up again. Real wages will start rising in late 2023, and strong population growth provides foundational support.

“Where Australia’s economy really needs to stir into action is in relation to business investment. Business investment looks to be on a slowing trend in these forecasts, growing by just 2.9 per cent in 2023-24 and 1.6 per cent in 2024–25.

“There is a risk that the current economic malaise sends businesses into a cost-cutting mode. But it is vital that businesses do not cut costs at the expense of taking advantage of growth opportunities coming in 2024.

“Australia’s federal and state governments have the potential to make a difference in this economic transition – but not by doing nothing. Expected government investment growth of 7.5 per cent in 2023–24 will play a part – although only if that investment is well-targeted.”

[Related: CreditorWatch fast-tracks assessment process for brokers]