Businesses at Risk as Record High Default Rates Raise Alarm Bells

A pedestrian moves past a shop window in Sydney, Australia, on Aug. 16, 2022. (Lisa Maree Williams/Getty Images)

More and more Australian businesses are facing insolvency risk as trade payment defaults reached a record high in June due to the impacts of inflation and interest rate hikes.

According to a new report by CreditorWatch, a credit reporting agency, business-to-business trade payment defaults rose to 1,586 cases in June, up 52 percent from a year ago.

Credit enquiries, which occur when a creditor checks a potential customer’s credit report, surged by 161 percent in the year to June as companies tighten their due diligence processes and credit policies when conducting business.

While external administrations dropped during the month, they were 13 percent higher than the previous year’s figures and were likely to go up further in the coming months.

CreditorWatch also forecasted an upward trend in court actions as businesses sought to recover their debts.

In addition, the credit reporting agency predicted that the national default rate for the next 12 months would rise from the current 4.71 percent to 5.76 percent.

CreditorWatch CEO Patrick Coghlan said the 12 consecutive interest rate hikes implemented by the Reserve Bank of Australia (RBA) since May 2022 had begun to take a toll on small businesses and consumers.

“The impact of the rate rises, as well as high inflation, is increasingly being felt by businesses as consumers tighten their belts,” he said.

“Forward orders are going down as demand falls away, and both business and consumer sentiment is in rapid decline.”

Echoing the sentiment, Australian Chamber of Commerce and Industry CEO Andrew McKellar said local businesses were suffering under current economic conditions.

“After experiencing 12 interest rate increases, declining consumer spending, and a surge in input costs, small and family businesses are being brought to their knees,” he said.

“To add to the pain, many struggling small businesses have seen their wages bill soar from July 1 as the annual wage review and increase to the superannuation guarantee have taken effect.”

Food and Beverage Industry Has the Highest Risk of Default

Among the sectors, food and beverage services have the highest chance of defaulting over the next 12 months at 7.06 percent due to its heavy dependence on discretionary spending, which is declining.

Transport, postal and warehousing comes second at 4.57 percent, followed by arts and recreation services at 4.55 percent.

In contrast, businesses in health care and social assistance are the least likely to miss payments, with the forecasted default rate of 3.24 percent, followed by agriculture, forestry and fishing at 3.49 percent and wholesale trade at 3.56 percent.

Shoppers flock to Pitt Street Mall in Sydney, Australia, on Dec. 26, 2022. (Roni Bintang/Getty Images)

Regarding geographic regions, the western Sydney suburbs of Merrylands, Guildford and Canterbury, which have high concentrations of businesses in construction, tourism and retail trade, were predicted to be the most at risk of insolvency in the next 12 months.

Meanwhile, western Brisbane experienced the most significant improvement in default rates over the past year due to a combination of factors, including very low rental and property costs, low personal insolvency rates, and very high median income.

Weakening Household’s Discretionary Spending

CreditorWatch’s report comes as Australia has seen a drop in household spending on discretionary goods and services, an important metric that measures the health of an economy.

According to the latest data from the Australian Bureau of Statistics, the household discretionary spending index in May 2023 was 0.6 percent lower than a year ago.

ABS head of business indicators Robert Ewin attributed the changes to the drops in discretionary spending on furnishings and household equipment (down 4.8 percent), and clothing and footwear (down 3.4 percent).

While overall household spending increased by 3.3 percent in May compared to the previous year, it was the lowest growth rate since July 2021.

Mr. Ewin said this was Australian households’ response to cost-of-living pressures, which were caused by inflation and interest rate hikes.

As consumer spending continued to trend downward, CreditorWatch expected a bleak outlook for Australian businesses in the next 12 months.