According to the latest report of CreditorWatch’s Business Risk Index for March 2023, businesses in Australia are back at pre-COVID activity levels despite continuing concerns about high inflation and interest rate.
The question is: How long can the recovery last, in light of the warnings from the International Monetary Fund that a global recession was imminent?
The Business Risk Index shows that, while the business activity is back to its pre-COVID level, there are still a few areas of concern. These include the increased number of external administrations, court actions, and the rise in the use by courts. Moreover, certain industries like Food and Beverage Services and Construction have a high default risk.
Business Risk Index March 2018: The Latest Insights Highlights Several Key Findings
- The B2B trade receivables increased by 45 percent year-on-year, due to the rising inflation rate and the return to normal business activity following pandemic.
- The increase in external administrations has been 35 percent year-over-year, in line with an increase in the trading activity.
- The number of court actions has increased by 22% year-on-year.
- Credit inquiries have risen by 28 percent from February to march and a staggering 149 percent year-on-year.
- The number of B2B payment defaults has increased by 20% year-on-year, following a seasonal drop in December and January.
- Western Sydney is home to six of Australia’s top ten regions with the highest likelihood of default due to its low median income, dense population, and low rankings on the ABS Index of Relative Social Advantage (RSA) and Index of Economic Opportunity (IEO).
- Norwood-Payneham St Peters, in South Australia, is the region that has the lowest risk of insolvency (across all regions with over 5,000 businesses). This is followed by Yarra Ranges and Victoria.
- Food and Beverage Services remains the industry at highest risk of default, due to declining discretionary expenditure and ongoing challenges like labor shortages.
- The number of external administrations within the construction industry continues to increase, reaching its highest level since July 2020.
BRI’s report shows that business activity is resilient and has bounced back on many indicators. The average trade receivables in March 2023 were $122,223, just eight percent lower than the March 2020 figure. This upward trend is a result of the increased work volume that businesses handle and the inflationary impact on prices.
The Australian Bureau of Statistics’ Monthly Business Turnover indicator for February 2023 shows that nine of thirteen industries have experienced an increase in business turnover year-over-year. Construction recorded the largest month-on-month growth in business turnover, at 4.6%.
The report shows that the increase in external administrations is also a result of this new trend. The report explains that this is due to the increase in business activity and inflation. Creditors are also increasing their collection activities. In March, external administrations increased by 35 percent compared to the previous year. The number of court actions is also increasing, with a 22 percent increase year-over-year. This is 1.5 percent above the level in March 2020.
According to the most recent report, credit inquiries, an important indicator of business growth, increased by 28 percent from February to march and have risen 149 percent year-on-year. B2B payment defaults increased by 20 percent year-on-year after a seasonal dip between December and January.
Western Sydney is home to six of Australia’s top ten regions for default probability. The main reasons for this are four: low median incomes, high population densities, low ratings on the ABS’s Index of Relative Social Advantage, and Index of Economic Opportunity. The dominant industries of these regions, such as construction, transport, and postal services, are also under pressure.
Default rate prediction
CreditorWatch predicts a sharp rise in B2B payments defaults during the second half of 2023 despite the recent rebound in business activity. Business sector currently faces tough trading conditions that are expected to continue in the next few months. Demand will likely decrease, particularly in sectors that depend on discretionary expenditure, as costs and interest rates continue to rise. Businesses that were barely profitable during low-cost periods will find it difficult to remain solvent in such an environment.
According to CreditorWatch, the industries most likely to default in the next year are Food and Beverage Services, Transport, Postal and Warehousing, and Arts and Recreation Services. Health Care and Social Assistance, Agriculture, Forestry and Fishing, and Wholesale Trade, on the other hand, are predicted to be the industries with the lowest likelihood of default over the next 12 months.
Australia’s recent monetary policy is restrictive. With a strong employment situation, it’s possible that the cash rate could rise again after the RBA meeting in May. The central bank will likely continue to restrict monetary policy for a long time before deciding on its next move.
Strong employment rates may be a boon to Australia, but they also contribute to its inflation problem. There is no evidence of the feared wage-price spiral, which is an important positive. The increase in variable interest rates on many fixed rate loans is expected to cause a further decrease in household spending per person. This expected decrease in household spending should help to reduce inflation rates.
Patrick Coghlan CEO of CreditorWatch says that the increased business activity in Australia in March is a testament to the resilience and strength of the Australian business sector.
He says that Australian businesses have faced a variety of challenges, including a pandemic, labour shortages and supply chain disruptions. They’ve also seen high inflation rates and increasing interest rates. It is encouraging to see that turnover has increased. We can’t ignore forecasts of more difficult times to come, as the demand continues to drop and costs continue.
“However, this current increase in turnover means that businesses will be in a better position as conditions tighten.”
Anneke Thompson is CreditorWatch’s Chief Economist. She says that the high workloads in many industries can explain the rise in monthly activity and trade receivables.
She says that the construction industry is particularly busy and invoicing is high.
The cost of construction is what is hurting this sector the most at the moment. Many projects are completed at a significant financial loss for the builder because the price that the owner pays is fixed at contract signing.