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Construction sector’s significance in a forthcoming tsunami of insolvencies

15 April 2024

A wave of Australian insolvencies will, according to leading industry practitioners, build to 10,782 by the end of the financial year, exceeding the annual peak of 10,757 in 2012 when companies struggled to survive the aftermath of the Global Financial Crisis (GFC).

Insolvencies this year are already tracking 36% above pre-Covid levels.

The highly stressed construction sector has recorded the largest increase in insolvencies in the past 12 months – the latest figures available to Macks Advisory revealing that 270 construction firms went to the wall in February (up from 195 in February 2023 and nearly triple collapses in February 2022).

Australian Securities and Investment Commission (ASIC) data shows total monthly corporate insolvencies rose to 967 companies in February of this year -- their highest level since 2015 and a 40% increase for the same month last year.  They’re forecast to exceed GFC levels this year as a prolonged period of reduced consumer and business spending has seen bank accounts run dry and balance sheets loaded with high-interest loans.

Most insolvencies are occurring in the accommodation and food services sector – up 60% in the past 12 months – but it is collapses of building and construction companies that are having the most significant negative affect on the economy.  The most recent ASIC number we’ve seen for construction company insolvencies this financial year is 2181, a 35% increase from 1615 a year ago.

Notably, these insolvencies appear to have shredded the Albanese government’s plans to build 240,000 homes annually for five consecutive years, this at a time when accommodation has seldom if ever been more desperately needed.

The back story to the crisis 

Credit Watch warns businesses will collapse in coming months because of cost pressures, interest rates, inflation, wage demands and labour shortages that have lifted the number of payment defaults to record heights in the past couple of months – an increase of about 50% in the past year.

Indeed, it forecasts that conditions will deteriorate in the immediate future and that it’ll take up to four cuts in the cash rate before consumers once more feel confident in making discretionary purchases, unlikely before early next year.

Credit Watch’s CEO Patrick Coghlan says a combination of rising payment defaults and lower invoice values is “a big concern” that suggests cash reserves are being depleted and margins are being squeezed.

“Less cash coming in means businesses are having trouble paying suppliers, orders are smaller, inventories are running down, enough business can’t be done to meet payroll costs, and unemployment increases.”

Credit Watch research reveals almost a quarter of business will become insolvent with 12 months of their first default, and that increases to 42% if there’s a second default.

There are optimists, but………

KMPG, although conceding that Australia is in the middle of an inflation-induced downturn, nonetheless rejects the view of analysts who say the economy won’t start to improve before next year. It declares the worst of the downturn will soon pass and that recovery is likely in the second half of this year, an opinion supported by NAB chief executive Ross McEwan.

Deloitte, however, seems to be lodging what looks like an each-way bet on whether now is a good time for businesses to pursue growth.

Prominent Deloitte partner for turnaround and restructuring Richard Hughes says there’s still capital available for this (and indeed an accompanying article in this newsletter suggests companies should be focusing on merges and growth).

But the group’s national lead in turnaround and restructuring Sal Algeri warns that SMEs will continue in the immediate future to be challenged by supply chain issues and costs, and that focusing on meeting these challenges should be their priority.

“Many construction companies and those businesses that rely on discretionary spending, face challenges. Businesses can also be disrupted by factors that include regulatory changes and introduction of new technology. And change will be most disruptive for businesses that can’t adapt or don’t adapt quickly enough.”

A savage brake on the economy  

Too much of a good thing becomes a bad thing, as is the case with Australia’s immigration program. At one time accelerating the economy, immigration is now a savage brake on it, exacerbated by poor productivity’s reduction of our international competitiveness.

Reforms to other drags on the economy (tax and regulatory systems for example) will involve strain and pain for gain, but reforming the nation’s out of control immigration program could be comparatively painless and would ease a lot of strain on everyone -- particularly those involved with home building or housing in any way, especially people trying to get and maintain a roof over their heads.

Almost a third of the people now living in Australia were born overseas, the highest proportion in more than a century according to an Institute of Public Affairs report, which says migration is driving population growth faster than the country can handle.

According to the report, net new migration as a proportion of the total population is now double the post World War II average, and the 31% of people living in Australia who weren’t born in the country compares with 29% for New Zealand, 21% for Canada, 15% for the US and 14% for the UK.

The report also claims Australia’s unprecedented and unplanned migrant intake “is placing immense pressure on housing and infrastructure, has not solved the nation’s shortage of skilled workers, yet will continue to be a critical factor in the economy ‘s function”.

An increasing number of authoritative critics of what’s happening with immigration, question the government’s wisdom in accepting an unprecedented, unplanned million migrants to Australia in a single year when its population is struggling to deal with the rising cost of living, a housing shortage, and skyrocketing rents.

Conclusion: If next month’s Budget doesn’t move to fix eminently fixable things that have contributed to rising insolvencies (particularly in the building and construction sector so significant to the economy), and if it doesn’t include provisions for bringing immigration under control, then expect to see political storm clouds gathering for the Federal Government. 

Disclaimer: The information contained in this webpage is general information and does not constitute legal advice. Nothing in this webpage is or purports to be advice. If you do need advice, then you ought to seek and obtain appropriate personal professional advice based on your personal circumstance.

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