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While closures have started to ease for the cafe, restaurant and takeaway food sector, they remain “worryingly high”, according to the latest research from credit reporting agency CreditorWatch which notes a turnaround in fortunes for businesses exposed to consumer discretionary spending.
The report still found that 10.6 per cent of businesses across the sector closed in the 12 months to November, although the result reflects a broader slowdown in business closures in the hospitality, construction and arts and recreation services sectors.
The CreditorWatch October Business Risk Monitor points to improvements in discretionary spending possibly from lower interest rates starting to filter through to households
The trend is consistent with consumer spending, which lifted 0.7 per cent in October, and the Westpac Consumer Sentiment Index which surged 12.8 per cent from October to November in the first positive read since February 2022.
However, the retail sector is facing challenges with the report citing a mixed performance, while also noting that insolvencies across the economy rose sharply in October.
In the retail sector, the report shows a drop of 6.94 per cent drop in closures for fuel retailing operations between September and October, but the department stores and hardware sectors along with building and garden supplies recorded month-on-month increases in closures of 7.94 per cent and 2.7 per cent respectively.
“We’re finally seeing the early signs of a turning point for industries most exposed to discretionary spending, but the data makes one thing abundantly clear: this recovery is fragile,” says CreditorWatch CEO Patrick Coghlan.
“While consumers are beginning to open their wallets again, many businesses, particularly smaller operators in hospitality and retail, remain under intense pressure.
“The sharp rise in trade payment defaults and stubbornly high closure rates tell us that now is not the time for complacency.
“Businesses need to stay vigilant, understand their credit risk exposure, and use timely data to protect cash flow as the economy transitions into this next phase.”
Notable, after a few relatively low months, insolvencies rose sharply in October to a new high for the cycle, says CreditorWatch.
New highs were recorded for construction; retail trade; transport, postal and warehousing; and professional, scientific and technical services.
Insolvencies in hospitality failed to hit new record highs for the cycle, but insolvencies did rise “notably”.
Payment defaults trend higher
The CreditorWatch Trade Payment Default Index has been trending higher in recent months and recorded a sharp rise of 13.9 per cent from September to October.
The index is now up 20.1 per cent year-on-year indicating that businesses are experiencing more difficulty in paying invoices. The report notes that trade payment defaults are a key red flag for potential insolvency.
The number of companies with tax debts of more than $100,000 has risen in two of the past three months.
The rate of new inflows in July and September is still a little lower than the same months a year ago, but it remains elevated which CreditorWatch says is consistent with a “broadly stable insolvency trend in coming months, rather than suggesting any significant improvement”.
CreditorWatch’s Economic Conditions Tracker, a predictive measure of the overall health of the economy, recorded a slight deterioration in October.
Among the positives, consumers reported that their family finances had improved compared to 12 months ago and businesses reported an improvement in profitability.
However, these were slightly more than outweighed by a relatively sharp jump in the relatively volatile unemployment expectations component.
CreditorWatch chief economist Ivan Colhoun says the agency earlier this year forecast that insolvencies could level out as the benefits of the income tax cuts in mid-2024 flowed through the economy.
“That assessment has largely been correct,” says Colhoun.
“The RBA’s latest economic forecasts provide mixed news for both businesses and consumers.
“Because of the surprise jump in inflation revealed in Q3, there will be no further near-term interest rate reductions.
“At the same time, the RBA anticipates that the unemployment rate will broadly remain very low at 4.4 per cent for the next two years as the economy expands at around 2-2.25 per cent in real terms.”
Colhoun says such a long period of stable unemployment is “unprecedented” over the past 50 years.
“Unemployment either trends lower or higher, meaning the likelihood is the RBA ends up being surprised in one direction,” he says.
“The rise in unemployment expectations suggests that could be to the upside.
“At the same time, and more positively, businesses continue to report better profitability in recent months. This seems to be evident in improving business conditions in WA, likely reflecting some benefits for the broader economy from the recent surge in precious metals prices.”
Colhoun says this leaves the economy at “a very interesting crossroads” that is consistent with the agency’s assessment that insolvency rates will broadly remain relatively stable at elevated levels in the months ahead.
“The rate of insolvency might be a little below the recent peaks, notwithstanding the bounce back in October, due to the improvement in our Economic Conditions Tracker, but there remain important cost pressures below the surface and ongoing structural changes that suggest a significant decline in insolvencies is unlikely.”
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