Economy may have turned corner, credit data shows

The Australian economy may have turned a corner, as the latest credit data reveals trade receivables and credit enquiries continuing to move upwards.

But inflationary pressures, rising interest rates, negative real wage growth, labour shortages, supply chain disruptions and high fuel prices will dampen positive growth, CreditorWatch warns.

The April 2022 CreditorWatch Business Risk Index (BRI) shows average trade payment receivables, the amount owed to a business by its customers following the sale of goods or services on credit, rose to the highest level since July 2021.

Credit enquiries, a leading indicator of increasing business activity, dropped over the month but were up 30% quarter-on-quarter.

CreditWatch BRI data, which ranked over 300 regions by relative insolvency risk based on data from around 1.1 million ASIC-registered businesses, showed the national probability of default remained flat at 5.8% in April but was forecast to rise over the next 12 months. 

Court actions dropped over the month but remained up 12% year-on-year.

Read more:  Trade activity improves but inflation, rate rises a threat

The April data showed a huge increase in the expected insolvency rates for the flood-affected areas of northern NSW and southern Queensland.

Business insolvencies in the area of Lismore (Richmond Valley – Hinterland) are forecast to rise by 36% over the next year.  Insolvencies in Rocklea – Acacia Ridge in Brisbane, are forecast to rise 14.5%.

In Queensland, the regions of Gympie and Maryborough are forecast to show increases in insolvencies of 0.6% and 1.5% respectively.

According to CreditorWatch, the five regions most at risk of default over the next 12 months are Grampians (VIC), Murray River - Swan Hill (Victoria), Limestone Coast (South Australia), Lachlan Valley (NSW) and Moree - Narrabri (NSW).

The five regions least at risk of default over the next 12 months are Bringelly – Green Valley (NSW), Merrylands – Guildford (NSW), Gold Coast – North (Queensland), Canterbury (NSW) and Surfers Paradise (QLD).

The highest risk areas are those where many small businesses are linked to construction, retail and professional services, CreditorWatch said.  Conversely, regional areas where a high portion of businesses are linked to agricultural production were the lowest-risk areas.

According to CreditorWatch BRI data, the three industries most at risk of default over the next 12 months are:

1. Food and beverage services: 7.1%
2. Arts and recreation services: 4.8%
3. Transport, postal and warehousing: 4.7% 

CreditWatch noted these industries are highly susceptible to dropping demand as a result of higher prices (inflation) and rising interest rates.

 The three industries least at risk of default over the next 12 months are:

1. Healthcare and social assistance: 3.3%
2. Agriculture, forestry and fishing: 3.6%
3. Manufacturing: 3.6%

While there were some “green shoots” emerging, CreditorWatch CEO Patrick Coghlan (pictured) said the outlook for Australian businesses is far from certain.

“It’s great to see trade receivables and credit enquiries trending up, in line with increasing business confidence, however, rising interest rates and inflation will undoubtedly slow this down to some degree,” Coghlan said.

Westpac figures indicated a lift in consumer spending (up 6.3% in the March quarter), and household savings remained high.  As interest rates rise further, borrowers adjust spending in line with higher repayments, Coghlan said they were likely to remain that way.

CreditorWatch chief economist Anneke Thompson said data showed “promising signs” that business activity is continuing to return to pre-COVID levels. In line with what central banks had noted, looking forward, there is still a “great degree of uncertainty” in economic conditions, she said.

“In his speech following the announcement of a 25 basis-point lift in the cash rate after the May board meeting, Governor Philip Lowe paid particular attention to outlining just how much uncertainty the RBA is currently dealing with,” Thompson said.

The ongoing war in Ukraine and associated supply chain issues remain a concern.  Domestically, she said there was no evidence as to how wage growth would respond when unemployment falls below 4%.

“He also noted the high levels of debt that Australians now have, compared to the last monetary policy tightening cycle. These statements suggest that the RBA won’t be too trigger happy with cash rate increases and will be carefully trying to steer inflation down without causing too much pain to Australian workers and mortgagors in the process,” Thompson said.

Default rates across Australian small businesses are on the rise, with CreditorWatch expecting SME defaults to peak at around 5.8% over the next 12 months.

Official cash rate rises do little to alleviate supply-side driven cost issues, which Thompson said creates a lot of uncertainty on how inflation will track as the cash rate rises.  This presents an issue for all businesses that will have to confront both rising prices and rising interest rates, she said.

Given the looming impacts of inflation and interest rate rises, currently 5.1%, CreditorWatch said there are risks defaults could rise above current forecast.

As many small business owners secure business loans against their home, CreditorWatch said any downside movement in house prices would impact the risk of small business defaults.