SYDNEY, Thursday 18 May 2023 – The April 2023 CreditorWatch Business Risk Index (BRI) has revealed that the average value of invoices (trade receivables) remained elevated in April despite other leading indicators showing that businesses are coming under increased pressure.
The Index also highlighted that businesses in South-East Queensland are coming under increased pressure, with four of the 10 worst performing regions in that area and Brisbane ranking as the worst performing capital city.
Key Business Risk Index insights for April:
- B2B trade receivables are up 36% year-on-year due to rising inflation but also a resumption of ‘normal’ trading activity post-COVID.
- External administrations dipped from March to April due to seasonality but were still up 13% YoY.
- Court actions also dropped in April due to seasonality but were up 26% YoY.
- Credit enquiries were up a massive 139% year-on-year.
- B2B trade payment defaults are down from March to April but up 35% YoY.
- The regions showing the biggest improvements in the rate of business failures are Port Phillip (VIC), Cairns – South (QLD) and Warringah (NSW).
- The regions showing the biggest increases in the rate of business failures are Chatswood-Lane Cove (NSW), Wyong (NSW) and Gosford (NSW).
- Four of the 10 highest ranking regions in Australia for probability of default are located in South-East Queensland; all regions feature higher than average commercial rents, high rates of personal insolvency and lower median incomes.
- Unley in South Australia is the region with the lowest insolvency risk (across regions with more than 5,000 businesses), followed by Norwood-Payneham-St Peters, also in SA.
- Food and Beverage Services remains the industry at highest risk of default, due to its reliance on discretionary spending, which is in decline, as well as ongoing challenges such as labour shortages.
- The rate of external administrations in the construction industry continue to trend upward – sitting at a their highest point since June 2020.
- External administrations in the Healthcare and Social Assistance sector, while still low, are at their highest rate since CreditorWatch began reporting this data in January 2015.
The increase in receivables was consistent with the Australian Bureau of Statistics’ (ABS) Monthly Business Turnover Indicator for March, which showed year-on-year increases in turnover across 11 of 13 industries. Arts and Recreation Services recorded the highest month-on-month increase in business turnover at 9.7%, while the largest fall was in retail trade (-2.0%).
CreditorWatch CEO, Patrick Coghlan, says that the increase in trade receivables is encouraging, but other leading indicators are of concern. “The pick up in trading activity is great to see but my excitement is tempered by our data on external administrations, in particular, which are rising across almost every industry,” he says. “While this is a return to pre-COVID levels in most instances, the rate of external administrations in industries such as healthcare and media/telecommunications is beginning to exceed that.”
CreditorWatch Chief Economist, Anneke Thompson, says we are at an unsustainable stage in the economic cycle where business conditions are generally good but consumer demand is plummeting. “Given all the incoming data, there is little doubt that default rates and external administrations are going to increase,” she says. “The areas that are going to be particularly impacted are those that are most reliant on labour, as labour supply still appears to be in strong demand, despite high overseas migration.”
Biggest movers
Biggest movers up
Sources: CreditorWatch Business Risk Index and ABS
Biggest movers down
Sources: CreditorWatch Business Risk Index and ABS
Best regions and capital cities (5,000+ businesses)
Sources: CreditorWatch Business Risk Index and ABS
Worst regions (5,000+ businesses)
Sources: CreditorWatch Business Risk Index and ABS
The worst regions in our bottom 10 index have now consolidated exclusively around SE Queensland and Western Sydney. This is partly due to the added burden of additional interest rate rises on households with home loans, which are typically in areas with a large number of new housing estates. For South East Queensland, particularly the Surfers Paradise region, there is the added burden of higher commercial rents and low international tourism numbers that are adding to financial difficulty of businesses in the area.
Trade receivables
Data Sources: CreditorWatch trade receivables data (accounting software integration)
External Administrations
Data Sources: CreditorWatch trade receivables data (accounting software integration)
External administrations appear to be broadly following trend, and a noticeable increase is yet to be recorded in our data. Consumer confidence has now plummeted to record lows and has been sustainably low for some time.
While the roughly 30% of households who have neither a home loan nor are renters are, by and large, insulated from this extreme monetary policy tightening, but the flow on impacts will soon be hitting the broader sector. It is almost without doubt, however, that in an environment of still rising costs for many industries, particularly those reliant on labour, and falling demand, that external administrations will rise.
CreditorWatch default rate prediction
Source: CreditorWatch risk score credit rating average probability of default by industry. Default defined as external administration, strike-off or deregistration in the next 12 months
Probability of default by industry
The industries with the highest probability of default over the next 12 months are:
- Food and Beverage Services: 7.18%
- Transport, Postal and Warehousing: 4.66%
- Arts and Recreation Services: 4.62%
The industries with the lowest probability of default over the next 12 months are:
- Health Care and Social Assistance: 3.26%
- Agriculture, Forestry and Fishing: 3.53%
- Wholesale Trade: 3.58%
Industry insolvency rates
Services inflation remains the greatest concern for the RBA, and is indeed impacting Australian businesses. Whilst it is fairly clear that goods inflation is receding, there is no noticeable downward trends for services inflation. High overseas migration is both a solution and a problem for services inflation, as it adds to both labour supply and demand.
What is going on in South-East Queensland?
Default rates for businesses in South-East Queensland are considerably higher than the national average. This is a function of factors such as high rental and property costs, high personal insolvency rates, low median income and high population density (Surfers Paradise and Southport in particular).
These areas are also very reliant on discretionary spending, and for Surfers Paradise in particular, spending from overseas. Queensland also appears to be suffering from higher than average labour costs. Even though the state has recorded a large influx of migrants, the outlook for construction costs and labour, as an example, is higher than other areas. This is because many migrants to Queensland are of retirement age, so actually add to the demand for labour, and don’t contribute to the supply of labour.
Outlook
The outlook for the Australian business community continues to be one of quite extreme pessimism. The great positive of the Australian economy is the strong labour market, and this is making many households feel reasonably comfortable with their financial position.
Unfortunately, to get inflation under control, the unemployment rate will have to rise, and that will shake the foundations of many Australians who either directly lose their job, or are exposed to job losses in their firms.
There are no easy solutions to inflation. However, of all the ‘narrow paths’ to economic stability being trodden around the world, Australia’s economy has probably the best chance of actually executing, and is in better shape than most, despite ongoing global instability.
-ENDS-
Contacts
Laura Sanford
Group Account Director, Herd MSL
laura.sanford@herdmsl.com.au
0455 145 164
Michael Pollack
Head of Content, CreditorWatch
michael.pollack@creditorwatch.com.au
0422 513 258
Mitchy Koper
GM Communications & Marketing, CreditorWatch
mitchy.koper@creditorwatch.com.au
0417 771 778
ABOUT THE BUSINESS RISK INDEX
The Business Risk Index is a predictive economic indicator to help guide businesses when making future growth plans and inform public policy. It is a new credit rating that ranks more than 300 Australian geographies by relative insolvency risk, providing unique insights into the health of Australian businesses by region.
Each region is ranked from best to worst in terms of the potential for businesses in it to become insolvent. The index can also measure the potential for insolvency risk at a national, state and individual business level.
Regions are ranked on a scale from zero to 100, where 100 represents the best credit quality regions, that is, the lowest risk of insolvency, and zero represents the weakest credit quality regions, that is, the highest insolvency risk.
The index is calibrated by data from approximately 1.1 million ASIC-registered, credit-active businesses. It combines these insights with CreditorWatch’s proprietary data, previously published as the monthly Business Risk Review.
Subscribe to the Business Risk Index to be the first to receive our monthly updates.
GLOSSARY OF TERMS
- Probability of Default – The National Probability of Default is an early indicator of the average number of Australian businesses expected to fail over the next 12 months. ‘Fail’ is either a liquidation event, ASIC strike off of the company, or deregistration.
- Trade Receivables – the average value of invoices owing per CreditorWatch data supplier. It is a key indicator of business-to-business trade and a critical barometer of the overall health of the Australian economy.
- External Administrations – number of companies that have entered administration, had liquidators appointed or gone into receivership.
- B2B Trade Payment Defaults – the number of payment defaults registered by CreditorWatch users for non-payment from counterparties.
- Court Actions – The number of finance and business-related court judgements in Australian courts.
- Credit Enquiries – The number of credit checks on performed on businesses through the CreditorWatch platform.
Extracted in full from: CreditorWatch Business Risk Index April 2023
