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Will pre-COVID business levels last?

The latest report from the CreditorWatch Business Risk Index (BRI) for March 2023 indicates that businesses in Australia have returned to pre-COVID levels of activity, despite ongoing concerns over high inflation and interest rates. 

However, the pressing question remains: how long can this recovery be sustained, given the ominous warnings of a global economic downturn by the International Monetary Fund (IMF) last week?

Overall, the Business Risk Index for March shows that while business activity has returned to pre-COVID levels, there are still several areas of concern, such as the increase in external administrations and court actions. Additionally, industries such as Food and Beverage Services and Construction are at high risk of default.

The latest insights from the Business Risk Index for March highlight several key findings:

  • B2B trade receivables have increased by 45 per cent year-on-year due to rising inflation and a return to normal trading activity after the pandemic.
  • External administrations have risen by 35 per cent year-on-year in line with the increase in trading activity.
  • Court actions are back to pre-COVID levels and have increased by 22 per cent year-on-year.
  • Credit enquiries have surged, rising by 28 per cent from February to March and a massive 149 per cent year-on-year.
  • B2B trade payment defaults have increased by 20 per cent year-on-year following a seasonal dip in December and January.
  • Six of the top 10 regions in Australia with the highest probability of default are located in Western Sydney due to low median income, high population density, and low positions on the ABS’s Index of Relative Social Advantage and Index of Economic Opportunity.
  • Norwood-Payneham-St Peters in South Australia is the region with the lowest insolvency risk (across regions with more than 5,000 businesses), followed by Yarra Ranges in Victoria.
  • The Food and Beverage Services industry remains at the highest risk of default due to declining discretionary spending and ongoing challenges such as labor shortages.
  • External administrations in the construction industry continue to rise, reaching their highest point since July 2020.

The BRI report highlights that, on multiple indicators, business activity has shown remarkable resilience in bouncing back. The average trade receivables for March 2023 stood at $122,223, which is just eight percent below the figure recorded in March 2020. This upward trend can be attributed to the high work volumes that businesses are handling and the impact of inflation on pricing.

These figures are consistent with the Monthly Business Turnover Indicator for February 2023 from the Australian Bureau of Statistics (ABS), which shows that nine out of 13 industries experienced a year-on-year increase in turnover. The construction industry recorded the highest month-on-month increase in business turnover at 4.6 per cent.

However, while business activity has picked up, the report indicates that this trend has also led to an increase in external administrations. This is in line with the rise in business activity, high inflation, and creditors ramping up collection activity. External administrations rose 35 per cent year-on-year in March. Court actions also continue to increase, up 22 per cent year-on-year and 1.5 per cent above the March 2020 level.

Credit enquiries, a key indicator of rising business activity, surged 28 per cent from February to March and have skyrocketed 149 per cent year-on-year, according to the latest report. Meanwhile, B2B trade payment defaults have increased 20 per cent year-on-year following a seasonal dip in December and January.

The March data also reveals that six out of the top 10 regions with the highest probability of default in Australia are located in Western Sydney. This is primarily attributed to four factors, including low median income, high population density, and low rankings on the ABS’s Index of Relative Social Advantage and Index of Economic Opportunity. In addition, the dominant industries in these regions – construction and transport, postal and warehousing – are under immense pressure, which further exacerbates the situation.

Default rate prediction

CreditorWatch has predicted a sharp increase in B2B payment defaults in the latter half of 2023, despite the rebound in trade activity observed in March. The business sector is currently facing tough trading conditions, which are expected to persist in the coming months. Demand is likely to decrease, especially in sectors that rely on discretionary spending, while costs and interest rates remain high. In such an environment, businesses that were barely profitable in low-cost times will face difficulties remaining solvent.

According to CreditorWatch’s analysis, the industries with the highest probability of default over the next 12 months are Food and Beverage Services, Transport, Postal and Warehousing, and Arts and Recreation Services. On the other hand, Health Care and Social Assistance, Agriculture, Forestry and Fishing, and Wholesale Trade are predicted to have the lowest probability of default in the next year.

Australia’s monetary policy has become restrictive recently, and with a robust employment situation, there is a high possibility that the cash rate will rise again following the RBA’s May meeting. Monetary policy is expected to remain restrictive for an extended period before the central bank considers its next course of action.

Although strong employment rates are a boon for Australia, they contribute to the country’s inflation problem. However, there is no sign of the feared price-wage spiral, which is a significant positive. In the near future, household spending per capita is expected to decrease further due to a rise in variable rates for many fixed-rate loans. This decrease in spending is expected to aid in reducing inflation rates, which should reflect in the September CPI data.

CreditorWatch CEO, Patrick Coghlan, says the increase in business activity in March is testament to the resilience of the Australian business community.

“From a pandemic to labour shortages, supply chain disruptions, high inflation and rising interest rates, Australian businesses have had it all thrown at them,” he says. “To now be registering these increases in turnover is a very encouraging sign. However, we can’t ignore the forecasts for more tough times ahead as demand drops and cost pressures remain.

“However, these current increases in turnover mean that businesses will thankfully be in a stronger position as conditions tighten.”

CreditorWatch Chief Economist, Anneke Thompson, says the increase in trade receivables and monthly business activity can partly be explained by the still very high workloads that many industries are still dealing with.

“The construction industry, in particular, is still working through very high volumes of work and is invoicing at a very high rate,” she says.

“It is the cost side that is really damaging to this sector at the moment, with many projects being completed at a substantial financial loss to the builder due to the price the owner pays being fixed at the time of contract signing.”

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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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