Credit reporting agency CreditorWatch has unveiled concerning findings regarding the hospitality sector, indicating that 16.2% of businesses within the food and beverage services category are classified as ‘high’ or ‘very high’ risk. This figure far surpasses other industries, with Administrative and Support Services at 7.2% and Arts and Recreation Services at 7.0%.
The hospitality sector is currently grappling with numerous challenges, including elevated interest rates, soaring input costs, rising energy prices, decreased foot traffic in CBD areas, and diminished consumer demand driven by cost-of-living pressures. These factors contribute to the sector’s vulnerability, prompting CreditorWatch to forecast a closure rate of 8.9% over the next 12 months.
On the other hand, the Wholesale Trade sector shows a healthier outlook, boasting 58.6% of businesses rated as ‘low’ or ‘very low’ risk, followed closely by Manufacturing at 57.8% and Agriculture, Forestry, and Fishing at 51.3%. In stark contrast, only 18.2% of food and beverage businesses fall into the low-risk category, with a mere 0.6% rated as very low risk.
CreditorWatch Chief Economist Ivan Colhoun noted that lower risk ratings are typically associated with government-funded business categories. He expressed curiosity about potential shifts in risk ratings for the Education and Training sector over the next year, given recent federal government policy changes regarding higher education and immigration.
CreditorWatch CEO Patrick Coghlan emphasized that industries reliant on discretionary spending, such as hospitality and the arts, are unlikely to see improved conditions until the Reserve Bank of Australia (RBA) begins cutting interest rates. “Discretionary spending is one of the few ways that consumers can actively cut costs,” Coghlan stated, indicating that consumers may choose to dine out less or reduce entertainment expenses until economic pressures ease.
High closure rates expected in hospitality and arts
CreditorWatch anticipates that the Food and Beverage Services and Arts and Recreation Services sectors will face the highest closure rates over the next year, followed by Financial and Insurance Services. The closure rate encompasses voluntary and involuntary administrations, ASIC strike-offs, and the closures of solvent businesses.
The agency’s models predict an uptick in business failures across four sectors: Food and Beverage Services, Financial and Insurance Services, Rental, Hiring and Real Estate Services, and Agriculture, Forestry, and Fishing. The forecasted deterioration in three of these sectors is largely attributed to the delayed impacts of tighter monetary policy on discretionary spending.
With reduced foot traffic in urban centers, the Food and Beverage Services sector is particularly vulnerable, as failure and arrears rates are notably higher for city businesses compared to those in non-metropolitan areas. While Financial and Insurance Services and Rental, Hiring and Real Estate Services do not currently exhibit a significant rise in high-risk ratings, increased pressure is anticipated as monetary policy remains restrictive.
Insolvencies reach record highs
In September 2024, ASIC reported that 1,225 companies entered insolvency for the first time, a number that reflects a concerning trend. Although the overall number of insolvencies has surpassed previous peaks during the Global Financial Crisis, the increase is somewhat tempered by the substantial rise in the number of registered companies, which now totals approximately 3.4 million.
While insolvencies are indeed on the rise, the proportion of failing companies is not as high as during past economic downturns. The resumption of ATO collections may be contributing to this surge in insolvencies, as businesses catch up after a period of reduced enforcement during the COVID-19 pandemic. Ivan Colhoun concluded that the combination of restrictive monetary policy and lingering effects from the COVID-19 pandemic is heightening the risk of business failure, particularly in interest-sensitive and consumer discretionary sectors. While insolvency rates are rising, they are not yet alarmingly high, and the expected interest rate cuts in early 2025, along with recent tax cuts, may provide some relief to struggling businesses.
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