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Credit: Eduardo Soares

Australia’s economy: A mixed bag with signs of slowdown

Key highlights:

  • The CreditorWatch Business Risk Index shows a concerning downward trend in invoice values, a potential indicator of slowing economic growth.
  • A “per capita” recession is underway, with GDP growth remaining low.
  • Business-to-business trade payment defaults are rising, suggesting cash flow challenges for businesses.
  • This trend could lead to an increase in business failures in the latter half of 2024.

Amidst a backdrop of economic intricacies and evolving market dynamics, Australia’s fiscal landscape is both nuanced and volatile.

As the Reserve Bank of Australia (RBA) maintains a cautious stance, retaining the cash rate in its recent deliberations, the nation’s economic indicators paint a mosaic of mixed fortunes across various sectors.

Led by Anneke Thompson, Chief Economist at CreditorWatch, this analysis delves into the intricate interplay of interest rates, labor force dynamics, and consumer sentiment, shedding light on the nuanced challenges and opportunities that define Australia’s economic trajectory.

Interest Rates

Household and business borrowers around Australia were greatly relieved when the Reserve Bank of Australia (RBA) opted to maintain the cash rate during its March meeting.

The decrease in December quarter inflation from 5.4 per cent to 4.1 per cent signalled the effectiveness of the RBA’s monetary policy actions in curbing inflation.

Labour Force

The labour force data for February 2024 surprisingly indicated a 0.4 percentage point decline in the seasonally adjusted unemployment rate, reaching 3.7 per cent. While this decrease is favourable for job seekers, it may lead the RBA to prolong the maintenance of the cash rate at its current 4.35 per cent, as concerns arise regarding its impact on wage growth and potential inflation.

Encouragingly, the unemployment rate has remained stable at 3.8 per cent on a trend basis for the past six months, indicating a balance between employment and migration rates, which adequately supports the growing workforce amidst record levels of migration in Australia.

Retail trade and consumer confidence

Spending at cafes and restaurants and on takeaway food peaked in August 2023, and has been on a slight downward trend since then. This is highly unusual in Australia as we typically spend more in this sector over the Christmas and summer holiday period.

Following the end of lockdowns around September 2021, there was a significant surge in spending in this sector as Australians eagerly sought opportunities to socialise, leading to continued growth even after expenditures on household goods and clothing and footwear slowed down.

However, the recent downward trend suggests that Australian households are now feeling the effects of high interest rates, rents, and inflation on everyday non-discretionary goods and services.

A recovery in discretionary consumer spending is anticipated to depend on the RBA’s implementation of three or four cash rate cuts, which is not expected until around this time next year. Westpac’s consumer confidence index for March experienced a decline by 1.8 per cent[1], despite a positive upturn noted in February. However, consumer confidence persists at historically low levels, registering at 84.4, notably below the long-term average of 100.7.

Following the RBA’s March cash rate decision, surveyed consumers displayed increased pessimism compared to earlier surveys, likely influenced by revised expectations regarding future rate cuts.

Business conditions and outlook

CreditorWatch’s Business Risk Index (BRI) data highlights the average value of B2B invoices has exhibited a significant downward trend throughout 2023, a trend that has persisted into 2024, as evidenced by data from the December quarter Australian National Accounts. The slow growth of Gross Domestic Product (GDP) by a mere 0.2 per cent in the December quarter, resulting in an annual growth rate of 1.5 per cent, and the indication from the ABS’s Business Indicators of businesses reducing inventory levels, further underscore the challenges anticipated for the upcoming year. 

Additionally, the consecutive negative per capita GDP for three quarters signifies Australia’s entry into a ‘per capita’ recession, with the sustained decline in invoice values throughout 2023 serving as a reliable precursor to the broader economic slowdown.

In conjunction with the troubling deceleration observed in the value of invoices (CreditorWatch) and GDP growth (ABS National Accounts), February 2024 witnessed a notable surge in business-to-business (B2B) Trade Payment Defaults. These defaults, recorded by CreditorWatch when invoices surpassing $100 remain unpaid for over 60 days, indicate a substantial accumulation of overdue invoices among our customers and a rising impatience among businesses with late payers.

CreditorWatch research shows a strong correlation between payment defaults and business failures. Businesses with one default have a 24 per cent chance of going insolvent in the next 12 months. This rises to 42 per cent for two defaults against two businesses and 62 per cent for three defaults against three businesses.

We unfortunately anticipate a rise in external administrations throughout the latter half of 2024, due to persistently challenging business conditions and the notable increase in recorded trade payment defaults.

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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