The CreditorWatch Business Risk Index (BRI) for August 2022 has revealed that trade payment defaults have surged to their highest point since October 2020.
Payment defaults are now up by 53 per cent year-on-year. Court actions, another key indicator of business insolvency, also continue to rise and are up 51 per cent year-on-year. While external administrations were down nine per cent from July to August, they remain up 58 per cent year-on-year and 129 per cent since January.
Manufacturing is among the top three industries with the lowest probability of default over the next 12 months at 3.56 per cent, along with agriculture, forestry and fishing (3.26 per cent) and healthcare and social assistance (3.5 per cent).
These industries will continue to see strong demand, even in the event of lower overall consumer demand, given the essential nature of the goods and services they produce. CreditorWatch notes that manufacturing bears some downside risk due to the outlook for energy price increases, particularly gas.
The industries with the highest probability of default over the next 12 months are food and beverage services; arts and recreation services; and education and training. These industries continue to be those where consumers can quickly withdraw spending.
CreditorWatch continues to forecast a rise in business insolvencies due to multiple impacts to the economy such as high inflation, rising interest rates, labour shortages and supply chain disruptions.
On the positive side, trade receivables (the average value of invoices) are at their second highest point since June 2021, and up 11 per cent year-on-year, however, NSW and Victoria were heavily impacted by lockdowns in August 2021.
The report further reveals that Cottesloe-Claremont in WA is the lowest insolvency risk region with greater than 5,000 businesses. Western Sydney regions of Merryland-Guildford and Canterbury are the highest risk regions in the country with greater than 5,000 businesses.
CreditorWatch CEO Patrick Coghlan says the rising payment defaults is a disturbing trend but not unexpected.
“Our Business Risk Index data has been forecasting a rise in B2B payment defaults for some time now. The multiple challenges confronting many businesses, whether they be rising inflation and interest rates, labour shortages or the ongoing impacts of the COVID-19 pandemic, are all conspiring to make it that much tougher to pay invoices.”
According to CreditorWatch chief economist Anneke Thompson, the recent increases in the cash rate target are still yet to be fully felt by mortgage holders and businesses.
“The financial impact of monetary policy tightening does take some time to be felt in the repayments schedule of mortgage and business loan holders.
“We expect that the real pressure will start to mount by October/November, right before the Christmas shopping period. The RBA will be watching consumer spending patterns intently over this time to gauge any change in the behaviour of consumers.”
The BRI 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.
Learn more about CreditorWatch Business Risk Index here.