Insolvencies worry business leaders despite the RBA's rate cut decision
In the aftermath of media reports that 2024 was a horror year for many Australian brands forced to close their doors because of rising costs, business leaders are worried despite the Reserve Bank of Australia’s (RBA’s) decision on interest rates last month, that a recent massive spike in insolvencies will continue unabated this year.
CreditWatch chief economist Ian Calhoun says businesses are facing ongoing financial pressures, as are their customers, many of whom are having to sharply cut their household budgets to remain solvent.
He says he sees no sign of last July ‘s tax cuts flowing through the economy to boost discretionary spending.
The latest CreditWatch figures Macks Advisory has seen show Australian businesses are failing at their highest rate (5.04%) since the height of the pandemic in October 2020 (5.08%).
During the 2023-24 financial year 11,053 companies entered external administration according to the Australian Investments and Securities Commission (ASIC), up 40% on the previous year.
In the first half of the current financial year another 6746 businesses have gone belly up.
Construction companies figured prominently among these most recent casualties – 1650 insolvencies compared to 1288 during the same period a year earlier.
And we have yet to see the effects of those collapses on other building and construction companies across the nation.
Retailers too have been taking a beating, ASIC reporting that 365 retail trade businesses have gone into administration in the first half of this financial year – up 11% on the same period of the previous financial year.
We find it impossible to reconcile the above facts to implications by Prime Minister Anthony Albanese and Treasurer Jim Chalmers that there’s nothing serious to worry about because indications are that inflation is easing.
But that doesn’t necessarily mean inflation (now trending towards 3% and forecast to be down to 2.8% by June) will henceforth be sustainable within the RBA’s preferred range of 2% to 3%.
Not until sustainability is evident can inflation be said to be under control, and RBA governor Michele Bullock has made it plain it should not be assumed the recent 0.25 % cash rate drop is indicative of successive drops.
In any case we also find it impossible to reconcile the credibility of CreditWatch and ASIC data with National Bank chief executive Andrew Irvine’s view that “the economy is in reasonable shape”, despite the nation being stuck in a per capita recession for seven successive quarters.
Clearly, the Australian Financial Security Authority (AFCA) doesn’t believe the economy is in good shape. It has recently warned that personal insolvencies will surge 25% in the next 18 months.
Business leaders’ concerns
KPMG’s annual Keeping Us Up at Night survey reveals in both the short and long terms that lingering inflation, dealing with digital transformation and rising costs are, and will in the immediate future, be prime robbers of company executives’ sleep.
Data from 320 businesses shows 53% see digital transformation (including harnessing AI’s potential) as their most formidable challenge for 2025, followed by 42% that see need for protection against cyber risks as their prime challenge, and 39% of businesses leaders who believe controlling costs in a lingering inflationary environment will be their biggest challenge this year.
KPMG’s chief executive Andrew Yates says that while AI will increase productivity for many businesses, concedes there are “many unknowns” about its likely effect on them and the workforce.
“Nonetheless it’s encouraging that research on AI investment shows returns on it are either meeting companies’ expectations or in many instances exceeding them”.
However, he believes “changes in skills and training will be necessary to enable employees to come to grips with AI and so increase productivity essential for business growth that will lessen the economy’s current reliance on government spending”.
Mr Yates says it will be employers’ responsibility not only to implement these changes but to do so at a rate employees can accommodate – especially difficult when AI’s effects on a workforce and an organisation’s culture are largely unknown.
Meanwhile in America
Also largely unknown, but certain to influence Australia’s economy to some way, is what President Trump does in the months ahead.
If his trade policies or any other polices backfire and adversely affect the US, then axiomatically Australia will suffer to some extent – and corporate bankruptcies in America are at their highest level in 14 years.
There’s also been an increase in America in so-called “out of court manoeuvres” designed to prevent bankruptcies. There are now twice as many of these manoeuvres going on as there are bankruptcies, and a group of priority lenders who have clients with at least a $100m aggregate in loans, say they’re seeing their lowest returns in eight years.
Among major US corporate collapses in recent months are Party City (with 700 stores), Tupperware, Avon, Red Lobster and Spirit Airlines, all citing as causes inflationary pressures on costs and weakening consumer demand – as do many CEOs of Australian companies that have failed.
Gregory Daco who is chief economist at Ernst & Young in the US sees current problems there similarly to those faced by Australians – “persistently elevated costs of goods and services weighing on consumer demand, pressure that’s especially heavy for lower income families, although also increasingly affecting middle-income and upper-income families”.
The US Conference Board’s Consumer Price Index recently showed a 12.6-point drop on its Expectations Gauge, a measure of consumers’ short-term outlook for income, business and labour market conditions.
Comparable Australian indices show that consumers’ confidence, challenged by similar conditions to those in America, is waning.
Similarly, a couple of months ago a Westpac-Melbourne Institute survey showed consumer confidence subsided 0.7% to 92.1 points because responders indicated they were becoming increasingly worried about the economy as the Aussie dollar fell in value, as uncertainty persisted about future rate cuts, and as they became increasingly concerned by how technological advancements might affect their employment.
