Western Brisbane emerges as most improved region
The June 2023 CreditorWatch Business Risk Index has highlighted a sharp increase in B2B trade payment defaults, signalling growing stress among businesses and predicting a rise in insolvency rates in the coming months.
According to the CreditorWatch June BRI, businesses facing a payment default from a single trading partner have a 26% chance of insolvency within the next year. This risk rises to 45% for those with defaults from two trading partners and reaches 65% when defaults are lodged by three or more trading partners.
The report also revealed a decline in various leading business indicators, including credit enquiries, court actions, and external administrations, suggesting a deterioration in overall business conditions.
Western Brisbane was the most improved region in Australia, according to the CreditorWatch June BRI. Specifically, areas such as The Gap-Enoggera, Brisbane Inner-West, and Kenmore-Brookfield-Moggill showed progress.
These regions boasted below-average rental and property costs, above-average incomes, low personal insolvency rates, and high scores on the ABS indexes of social advantage and economic opportunity.
Key findings from the report include:
- B2B trade payment defaults reached a record high of 1,586 in June, representing a 52% year-on-year increase, surpassing the previous peak in March 2019.
- Credit enquiries surged by 161% compared to the previous year as businesses tightened their due diligence processes and credit policies.
- External administrations experienced a slight dip from May to June but remained 13% higher year-on-year, indicating an overall upward trend.
- Court actions continued to increase, though they have not yet returned to pre-COVID levels.
- CreditorWatch projects the national default rate to rise to 5.76% over the next 12 months.
- The food and beverage services industry faced the highest risk of default due to declining discretionary spending and ongoing challenges like labour shortages. It was closely followed by the transport, postal, and warehousing sector.
- The construction industry witnessed a rising rate of external administrations, reaching the highest point since April 2020.
- Unley in South Australia ranked as the region with the lowest insolvency risk among areas with over 5,000 businesses, followed by Norwood-Payneham-St Peters (SA) and Yarra Ranges (Victoria).
- Regions with the highest insolvency risk were clustered around Western Sydney and South-East Queensland, with Merrylands-Guildford (NSW) recording a forecast default rate of 7.80% for this time next year.
Leaders provide insights
CreditorWatch chief executive Patrick Coghlan (pictured above left), attributed the increasing pressure on small businesses and consumers to the Reserve Bank of Australia's 12 consecutive interest rate hikes, currently at 4.10%.
“The impact of the rate rises, as well as high inflation, is increasingly being felt by businesses as consumers tighten their belts,” Coghlan said.
“Forward orders are going down as demand falls away, and both business and consumer sentiment is in rapid decline. Thankfully, many businesses emerged leaner and more efficient in the wake of the pandemic after trimming fat and investing in technology, which bodes well for the tough conditions now and in the months ahead.”
Anneke Thompson, chief economist at CreditorWatch (pictured above right) said that while the pause in monetary policy tightening was a relief for business owners, it was expected to be temporary.
“Inflation is still too high, evidence from overseas also tells us that core inflation is proving 'sticky', and labour markets are still too tight,” Thompson said. “The RBA has succeeded in slowing consumer spending for goods and reducing inflation in this area, however, consumers alone can't bring down inflation.”
“A slowdown in business investment and hiring is now needed to further drive inflation down. For this reason, the RBA will be closely monitoring job vacancy and labour force data for signs that their policy intervention is flowing through to the business side. Our June BRI data strongly suggests that businesses are absolutely tightening their belts.”
CreditorWatch predictions on B2b trade defaults
According to the CreditorWatch report, the record number of B2B trade defaults reflects businesses' tightening cash flow processes. With high interest rates and inflationary pressures, business owners in FY2024 will have little tolerance for late payments, leading to elevated trade payment defaults.
As B2B trade defaults serve as a predictor of future insolvencies, CreditorWatch's default rate predictions continue to rise. The construction sector is grappling with high input costs eroding profit margins, compounded by low dwelling approvals, indicating a subdued demand outlook. Retailers and the food and beverage industry face depressed discretionary spending, particularly as more home loans transition from fixed rates.
While areas with higher average incomes are better equipped to weather tightening trading conditions across most industries, younger populations and businesses primarily focused on construction, tourism, and retail trade face higher insolvency risks.
The report also highlighted industry-specific probabilities of default for the next 12 months, with the food and beverage services industry topping the list at 7.06%, followed by transport, postal, and warehousing at 4.57%. Conversely, the health care and social assistance industry demonstrated the lowest probability of default at 3.24%.
Looking ahead, the start of the new financial year is expected to bring increasing pessimism among Australian business owners, particularly those reliant on discretionary spending, according to CreditorWatch. While labour force data remains strong, a gradual rise in the unemployment rate is anticipated as businesses brace for weaker conditions in the next 12 months.
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