Where does your business and household sit in economy’s worrying state of affairs?
Business failures have reached a 14-week high to return to pre-pandemic levels as rising interest rates and a weakening economy hurt corporate Australia.
Experienced business individuals say it’s a situation exacerbated by the end of an era of cheap money, banks becoming less forgiving of financially distressed corporate borrowers, and the Australian Taxation Office’s pursuit of directors of companies with unpaid tax debt.
Invoicing finance lenders tell Macks Advisory they’re being “swamped” by companies seeking short-term lines of credit across the economy as banks pull back from lending.
And independent economic consultancy Business Outlook reports the Reserve Bank of Australia’s 11 rate increases in a year has put the economy “on a knife edge”, so that the nation now faces its weakest rate of economic growth (outside of the pandemic) since the recession of the early 1990s.
In this worrying and surging mix of financial angst are at least 300,000 households that Deloitte Access Economics believes may be experiencing negative cash flows because of what it claims have been “unnecessary” rate rises.
Remembering – Buffett’s investing maxim: be fearful when others are greedy and greedy when others are fearful. Right now, he will see perhaps the commencement of a fertile environment for suitable brave lenders who may step in to provide financing where others are retrenching/retreating.
Corporate collapses in SA
According to the Australian Securities and Investments Commission (ASIC) there were 1882 corporate insolvencies in Australia in the March quarter, up 74% from the same time last year, compared with 88 administrations and liquidations in SA – a 69% increase on the 52 during the corresponding period last year.
Business SA chief executive Andrew Kay says that while major events including Mad March, the AFL Gather Round andLIV Golf have injected some confidence into local businesses, many are still “doing it tough”.
Macks Advisory’s sources tells us that what’s happening is much more than a correction towards pre-COVID levels and goes beyond dealing with zombie companies.
It’s very much the result of businesses suffering the hangover of excesses of the past decade, where loan money has been close to free. Business operators’ under-performance has been easily hidden behind cheap loans, instead of directors coming to grips with needs for fundamental structural reforms.
Households seem bound to suffer
Deloitte Access Economics partner Stephen Smith forecasts a downgrade in economic growth centred on households and a consumer recession expected next year, and leading economists’ predictions that household spending will finish this year below where it started.
Deloitte has downgraded growth expectations to 1.5% this year and 1.2% in 2024 from previous predictions of 1.7% and 1.6%, while in just 10 months the cost of servicing the average mortgage has risen $14,000 annually.
This means that in many instances mortgage repayments plus essential living expenses will exceed households’ disposable income, and the latest Financial Stability Review by the Reserve Bank of Australia notes that under fairly baseline assumptions for income growth and unemployment, 15% of variable-rate, owner-occupier mortgage holders will be suffering negative cash flow by the end of this year. (Deloitte forecasts unemployment to grow to 4.1% next financial year and to 4.6% the year after while inflation falls from 7.2% this financial year to 4.2% during 2023-24 and to 2.6% in the next financial year.)
It's in this context it’s also predicted fewer houses and apartments in a decade will be built this year and some 70,000 fewer than commencements recorded in 2021.
Higher interest rates are also beginning to put pressure on companies as well as individuals, eating into profits, with some businesses asking their lenders to forgo cash interest payments AND remembering in the short terms months ahead fixed rate loans will transition to variable rate loans at higher interest rates – more pain will be felt then.
As economic growth cools, we will see an uptick in corporate defaults, AND any lack of insight into the private credit market will inevitably show that “that the sector could harbour risks that are not currently visible”.
A global perspective
Ben Sayers, a senior economist in the US with Nationwide Economics tells us diesel demand is a reliable indicator of what’s happening with the world economy, and this indicates spending by households is waning and building recession risks are rising.
An observation also that the depth and duration of a US recession will be driven by the massive deleveraging of the financial and household sectors and will weigh heavily on global growth.
In China the number of trucks seen on highways recently has diminished noticeably. In Europe diesel’s premium to crude futures, according to S&P Global has plunged to the lowest level in more than a year, and in the US diesel demand seems certain to subside 2% this year.
Excluding 2020 when much of the economy came to a standstill, that 2% decline would be the biggest drop in US diesel use since 2016 – which is why S&P’s head of fuels and refining in America says, “we are assuming one of the worst economic climates in recent memory outside the GFC of 2008-9 and the pandemic”.
It’s also why economists -- who see weakening demand for diesel to fuel trucking fleets and construction equipment in many of the world’s largest economies -- are saying there’s a 65% chance of recession in the US during 2024, a 49% chance in Europe, but a somewhat lower risk in China (if it can recover rapidly from harsh COVID-19 restrictions).
Trucks account for 60% of diesel use in China where demand fell by 8%, four times more than the drop in US demand for diesel where trucking accounts for more than 70% of diesel use.
Australia imports more than 90% of fuels for freight-carrying trucks, 84.5 % of which are light commercial vehicles, 12.9% are rigid trucks and 2.6% are articulated trucks that on average use 99.8% of imported diesel.
The good news is the Australian trucking industry’s demand for diesel is expected to increase 2% this year while it’s falling in other developed countries – which suggests that although there are worrying indications of weakening in our economy, it’s economic outlook is nonetheless better than many of the world’s major economies. The bad news of course is that because Australia is so dependent on imported fuel it’s dangerously vulnerable.
“Only when the tide goes out do you discover who's been swimming naked” - Warren Buffett
