A new study has revealed that the percentage of companies in each industry that are 60 days or more in arrears has increased.
Trade receivables on average were down 18 per cent from the previous year in June. Trade payment defaults, another important indicator, are up 18 per cent year over year, mirroring the recent small fall in the NAB Business Confidence Index.
Business confidence is in jeopardy, according to the CreditorWatch Business Risk Index (BRI) for June 2022. Important indicators like trade receivables and credit inquiries are declining, while trade payment failures are still registering at pre-COVID levels.
Furthermore, the number of court actions has grown since March 2020 (pre-COVID), indicating that lenders have resumed their customary collection activities.
While construction remains the industry with the highest rate of late payments, the proportions of late payers in most other sectors increased. According to CreditorWatch, the Food and Beverage and Arts and Recreation services sectors continue to have the highest level of trading risk.
Insights from the Business Risk Index for June:
- Trade receivables and credit enquiries are down month on month, indicating that business confidence has reached a bottom.
- Credit inquiries fell somewhat from May to June, but are still up 8 per cent year on year.
- Court actions have reached their highest level since March 2020, indicating that lenders have started their usual collection operations.
- Several negative effects will continue to wreak havoc on the economy in the coming months.
- In June, the Business Risk Index national default rate remained unchanged at 5.8 per cent.
Given the weakening economic outlook, CreditorWatch notes that forecast default rates will rise significantly more than not. CreditorWatch predicts an increase in corporate insolvencies until 2022.
Australia’s unemployment rate is the lowest in nearly five decades
In June, the jobless rate in Australia fell to 3.5 per cent, the lowest level in 48 years. The economy gained an estimated 88,400 jobs last month. However, Anneke Thompson, Chief Economist, CreditorWatch observes that the economy is still facing many challenges.
“While today’s ABS Labour Force figures are very positive for employees, headwinds still abound in the economy. A strong increase in youth employment – 23,000 people or around a 1.1 per cent increase – accounted for almost a quarter of the increase in employment. This indicates that young people may be starting to see the effects of the lack of Covid support payments, coupled with higher costs of living and are therefore increasing their employment activity in a strong job market.
“With the employment rate dropping to 3.5 per cent, this is the lowest rate recorded since 1974. What this means though is that higher inflation will be with us for some time yet and it will put upward pressure on interest rates for the foreseeable future. The very high levels of employment reflect businesses’ capacity utilisation levels, which according to NAB are at 84.8 per cent. This level has been fairly consistent for months now and correlates strongly with the unemployment rate. It is likely we won’t see any negative movement in unemployment until capacity utilisation starts to decline.
“CreditorWatch’s B2B Trade Receivables data, as revealed in its latest Business Risk Index, noticeably declined in June 2022. This comes after a steady few months of increases, indicating that businesses may have reached the peak of capacity utilisation. NAB June 2022 forward orders also declined slightly, mirroring CreditorWatch data which suggests business confidence is noticeably dropping off, particularly in the Retail Trade sector.
“This may be the first industry that starts to pull back on hiring when consumers slow their spending behaviour. We also expect that the slowdown in housing market activity will impact businesses reliant on transactions in this sector, such as mortgage brokers, conveyancers and credit providers.”
Default outlook for SMEs
Business default rates in Australia are expected to peak at about 5.8 per cent over the course of the next 12 months, according to CreditorWatch. They warn that due to the delayed full effect of interest rate increases and higher labour costs until approximately October/November, this prediction is subject to upside risk.
Furthermore, according to the index, the industries with the highest likelihood of default over the next 12 months are –
- Food & Beverage Services: 7.1 per cent
- Arts and Recreation Services: 4.7 per cent
- Education and Training: 4.6 per cent
The following industries have the lowest likelihood of default in the next 12 months: –
- Health care and social assistance: 3.2 per cent
- Agriculture, forestry, and fishing: 3.5 per cent
- Manufacturing: 3.6 per cent
Consumer sentiment slides further in July
Australian consumer morale fell for the eighth month in a row, matching crisis lows in July, as the growing cost of living and rising interest rates soured the national mood.
The Westpac-Melbourne Institute index of consumer sentiment fell 3.0 per cent in July, compared to 4.5 per cent in June. At 83.8, the measure was down 23 per cent from July of the previous year, indicating that pessimists outweighed optimists.
“Given the 50bps increase in the cash rate at the June RBA Board Meeting, and further 50bps in July, it is almost certain that the decline in consumer sentiment will continue,” says Anneke.
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