Business closures in discretionary spending sectors are easing for the first time in years, signalling consumers are ready to spend again.
What’s happening: Business closures in sectors exposed to consumer discretionary spending are moderating for the first time in years, with hospitality, construction and arts showing improvement.
Why this matters: The shift signals interest rate relief is finally reaching households, encouraging discretionary spending after prolonged economic pressure.
Australian consumers are finally opening their wallets again, and businesses in sectors hammered by cost-of-living pressures are seeing the first signs of relief.
New data from CreditorWatch reveals a turnaround in prospects for industries exposed to consumer discretionary spending, with retail being the notable exception. Hospitality, construction and arts and recreation services are all experiencing a moderation in business closures.
The numbers
The October Business Risk Monitor shows consumer spending increased 0.7% during the month, whilst the Westpac Consumer Sentiment Index jumped 12.8% from October to November, marking its first positive reading since February 2022.
Despite the improvement, closures in the cafes, restaurants and takeaway food services category remain worryingly high, with 10.6% of businesses closing in the 12 months to November. Bars, pubs and clubs have fared better than food services outlets over the past two years, supported by poker machine revenue.
Pubs and clubs also tend to be larger businesses than cafes, restaurants and takeaway outlets, meaning they’re better able to weather economic downturns. However, all hospitality categories sit well above the national average for business closures of 5.4%.
Within retail, the biggest drop in closure rates occurred in fuel retailing, down 6.94% from September to October. Department stores and hardware, building and garden supplies saw month-on-month increases of 7.94% and 2.70% respectively.
Still under pressure
CreditorWatch CEO Patrick Coghlan says the data reveals how fragile this recovery remains. “We’re finally seeing the early signs of a turning point for industries most exposed to discretionary spending, but the data makes one thing abundantly clear: this recovery is fragile.”
“While consumers are beginning to open their wallets again, many businesses, particularly smaller operators in hospitality and retail, remain under intense pressure. The sharp rise in trade payment defaults and stubbornly high closure rates tell us that now is not the time for complacency. Businesses need to stay vigilant, understand their credit risk exposure, and use timely data to protect cash flow as the economy transitions into this next phase.”
After several relatively low months, insolvencies rose sharply in October to a new high for the cycle. New highs were recorded in construction, retail trade, transport, postal and warehousing, and professional, scientific and technical services. Interestingly, the hospitality sector did not record new highs for the cycle, though insolvencies did rise notably.
Across the first four months of the current financial year, there were significant rises in the number of insolvencies in retail trade (up 13%), transport, postal and warehousing (up 35%) and financial and insurance services (up 31%).
CreditorWatch’s Trade Payment Default Index recorded a sharp rise of 13.9% from September to October. The index is now up 20.1% year-on-year, reflecting that businesses are experiencing increasing difficulty in paying invoices. Trade payment defaults are a key red flag for potential insolvency, with the risk of insolvency over the coming 12 months as high as 8 to 15% for companies with one or more registered invoice default.
What’s driving recovery
The moderation in closures coincides with signs that interest rate relief is being felt by households. The Reserve Bank of Australia’s latest economic forecasts provide mixed news for both businesses and consumers.
CreditorWatch Chief Economist Ivan Colhoun says the current economic crossroads remains consistent with assessments that insolvency rates will stay relatively stable at elevated levels in the months ahead. “Early this year, we suggested that insolvencies may level out as the benefits of the income tax cuts in mid-2024 flowed through the economy. That assessment has largely been correct.”
“The RBA’s latest economic forecasts provide mixed news for both businesses and consumers. Because of the surprise jump in inflation revealed in Q3, there will be no further near-term interest rate reductions. At the same time, the RBA anticipates that the unemployment rate will broadly remain very low at 4.4% for the next two years as the economy expands at around 2 to 2.25% in real terms.”
Colhoun notes that such a long period of stable unemployment is unprecedented in the past 50 years. “Unemployment either trends lower or higher, meaning the likelihood is the RBA ends up being surprised in one direction. The rise in unemployment expectations suggests that could be to the upside.”
The road ahead
More positively, businesses continue to report better profitability in recent months. This appears evident in improving business conditions in Western Australia, likely reflecting benefits for the broader economy from the recent surge in precious metals prices.
CreditorWatch’s Small Business Risk Index indicates small business stress is beginning to ease, with the increase in the index beginning to slow. The index remains within the safe band for business stress and associated risk.
Small business failure rates are currently 14.9% above the 10-year average and have increased 10.6% over the past 12 months. Failure rates are highest in the hospitality sector, although they have begun to ease somewhat. Failure rates are lowest in agriculture, forestry and fishing, and remain relatively low in financial and insurance services, and healthcare and social assistance.
Colhoun concludes that the combination of factors leaves the economy at an interesting crossroads. “This remains consistent with our assessment that, broadly, insolvency rates will remain relatively stable at elevated levels in the months ahead. The rate of insolvency might be a little below the recent peaks, notwithstanding the bounce back in October, due to the improvement in our Economic Conditions Tracker, but there remain important cost pressures below the surface and ongoing structural changes that suggest a significant decline in insolvencies is unlikely.”
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