The October 2023 CreditorWatch Business Risk Index (BRI) has signalled a concerning downturn in Australian business activity, with key metrics showing a 34% year-on-year drop in the average value of invoices – the lowest since January 2015.
The 34% YoY decline painted a bleak picture of dwindling forward orders, mainly due to a contraction in consumer demand, creating a massive ripple effect down the supply chain.
B2B trade payment defaults, a key indicator of the likelihood of business failure, surged 60% since January, consistently sitting above pre-COVID levels. External administrations, too, spiked, rising 81% YoY to October, while credit enquiries have declined since May, reflecting reduced business activity and fewer commercial loan applications.
In a year-on-year comparison of capital city CBDs, Melbourne demonstrated a remarkable six-point improvement on the business risk index, reaching 32.8. This improvement is attributed to the city benefitting from a rebound in non-office activities following the easing of lockdowns.
Sydney Inner City, meanwhile, was the worst-performing capital, with a 4.8-point decrease in the index to 24.1.
In terms of regional risk, Western Sydney and South-East Queensland topped the list due to sensitivity to interest rate changes, due to relatively high level of debt among businesses and households, and lower-than-average incomes.
The best-performing regions include areas in regional Victoria, inner-city Adelaide, and North Queensland, characterised by lower property prices and higher incomes.
CreditorWatch is expecting a rise in the business failure rate from the current 4.21% to 5.78% over the next 12 months.
Food and beverage services faced the highest risk of business closure over the next year at 6.75%. This is followed by transport, postal, and warehousing, at 4.44%, and financial and insurance services, at 4.34%.
Conversely, health care and social assistance (3.15%), wholesale trade (3.34%), and agriculture, forestry, and fishing (3.42%) posted lower probabilities of default over the next 12 months.
Patrick Coghlan (pictured above left), CreditorWatch CEO, said the Reserve Bank’s efforts to tame inflation through interest rate hikes are hitting businesses hard due to reduced customer spending.
“Two of our leading indicators, average value of invoices and B2B payment defaults, paint a very clear picture of what businesses are going through at the moment: order values are dropping, therefore so are revenues, and margins are also being squeezed through inflation,” Coghlan said.
“That is causing an increase in the number of businesses that are unable to pay their invoices to suppliers – and that is a real worry because those defaults greatly increase the chance that a business will not survive into the future.”
With all the data pointing to another challenging Christmas trading period, he urged businesses to address outstanding debts before then.
Anneke Thompson (pictured above right), CreditorWatch chief economist, said CreditorWatch’s data is consistent with the monetary policy tightening as smaller business are always impacted first by increased interest rates.
“SMEs are more susceptible to changes in demand than bigger businesses and, on the personal side, many owners will have rising home-loan repayments to service, which may involve them having to remove more money from their businesses and reduce orders from suppliers where possible as a result,” Thompson said.
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