The April Business Risk Index from credit reporting agency CreditorWatch offers a mixed picture of how Australian businesses are faring during this period.
On the positive side, Aussie businesses stand to benefit from recent and future measures to cut interest rates this year, alongside slower price increases and lower fuel prices amid uncertainties brought about by the spectre of the US’ tariff policies under the Trump administration.
Insolvencies have also plateaued in recent months, albeit at high levels, with the construction and food and beverage services sectors the most affected by these high levels.
Overall, the past year has seen the hospitality sector hit the hardest, not only leading in business closures but also ranking highest across three key indicators of financial distress: insolvency rates, arrears (late payments), and ATO tax debt defaults over $100,000. This has resulted in one in 10 hospitality businesses in Australia shutting down over the past 12 months.
CreditorWatch CEO Patrick Coghlan commented that hospitality businesses are particularly vulnerable in several key areas. “They are exposed to the vagaries of discretionary spending. So, when households feel the pinch from interest rate rises and price increases, they typically spend less at places like cafes, restaurants, bars and pubs. The increase in people working from home has also had an impact, mainly in outlets in CBD areas.”
He added, “On top of that, you have the business cost increases in areas such as wages, electricity, insurance and food and alcohol. You also have to remember that most hospitality outlets are small businesses, so they usually don’t have the cash buffers to get them through hard times that large businesses often do. I really feel for them – it’s tough right now. There are many businesses out there barely hanging on.”
CreditorWatch says it doesn’t expect a major turnaround for the sector until households feel the impacts of at least a couple of further rate cuts in their budgets.
Chief economist Ivan Colhoun commented: “We hear so much about the cost-of-living crisis, but it’s a ‘cost of doing business crisis’ as well, with businesses having seen significant increases in their cost bases. Businesses exposed to discretionary spending experience the worst of both worlds, with their costs pressured and their customers’ demand weakened. Hopefully, the recent interest rate cuts by the RBA can build on the beneficial effects of last year’s income tax cuts and cost-of-living support.”
Colhoun also noted the economy is at a particularly interesting crossroads. “Insolvencies remain elevated but have not deteriorated in recent months, the previous rising trend likely arrested by the income tax cuts of mid-2024 along with Federal and State government cost of living support measures,” he said. “It’s too early for the RBA’s February interest rate cut to be influencing these figures, though that cut and this week’s rate reduction will be welcomed by both businesses and consumers. And should have beneficial effects in the second half of the year.”
“Working against this more favourable setting is likely to be a combination of slower population growth, the effects of continued high costs and the uncertain impacts of President Trump’s tariffs and trade wars globally,” Colhoun added.
“Thankfully, there has been some unwinding of tariffs in recent weeks, though the net effect on global growth is still expected to be contractionary. Taken together, we expect an elevated level of insolvencies to remain over the next six months.”
