External administrations reach record high amid economic challenges

According to the March 2024 CreditorWatch Business Risk Index (BRI), external administrations have surged to a record high in Australia. This surge comes as businesses grapple with a variety of challenges including cost pressures, skilled labor shortages, and declining consumer demand.

B2B payment defaults, while slightly down from the record high seen in February, remain up 22.6% year-on-year. According to CreditorWatch, this indicates that businesses are finding it increasingly difficult to settle outstanding invoices. Court actions have also been on the rise, gradually returning to pre-COVID levels.

One notable trend highlighted in the report is the dominance of the construction sector, which mainly consists of smaller sub-contractor businesses, in Australian Taxation Office (ATO) tax debt defaults. Of the over 15,000 tax debt default records currently held by CreditorWatch from the ATO, 23.8% are from the construction industry. This is followed by 12.5% in professional, scientific, and technical services, and 10.7% in food and beverage services.

CreditorWatch chief economist Anneke Thompson pointed out that such businesses often struggle to pay off large tax debts, particularly those operating as sole traders or partnerships.

“These businesses often have debt secured against personal assets, and debts of $100,000 or more would be a severe imposition on their ability to meet their ongoing financial obligations,” said Thompson.

Increased costs pressuring consumers and businesses

Patrick Coghlan, CEO of CreditorWatch, attributed the surge in external administrations to increased cost pressures on businesses and the impact of rising living expenses on consumers. He emphasized that until consumer spending increases, businesses are likely to continue facing challenging conditions, especially with no immediate relief in sight from high inflation rates.

“We don’t expect business conditions to improve markedly until consumer spending increases, and that is dependent on interest rate relief, which is not even on the horizon at this point given the high rates of inflation in the US,” said Coghlan.

Key insights from the BRI for March include:

• External administrations are at a record high, up 22.1% year-on-year.
• The construction industry leads in ATO tax debt defaults exceeding $100,000.
• B2B payment defaults decreased slightly from February to March but remain up 22.6% year-on-year.
• Court actions have increased by 45.5% year-on-year.
• The food and beverage services sector faces the highest risk of business failure.
• Mining sector insolvencies and late payments are on the rise due to various pressures including labor shortages and fluctuating commodity prices.

Looking ahead, the report suggests that the likelihood of cash rate cuts in Australia for the remainder of 2024 is remote due to high inflation figures in the USA. According to CreditorWatch, this indicates a continued period of weak consumer demand and high debt financing costs for businesses.

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