Indicators suggest downturn has begun: CreditorWatch

CreditorWatch has released its January 2023 Business Risk Index (BRI) report, with key indicators suggesting a downturn is all but assured for Australian businesses.

The report uses a range of measures to ascertain current business conditions and predict future movement. Its key indicator is trade receivables (average value of invoices), which experienced a seasonal drop in January (down 39% from December), continuing a downward trend since July last year.

B2B trade payment defaults were down 8% from December to January but are still up 39% year-on-year and showed a clear upward trend before the seasonal decline in November 2022.

In terms of probability of default by industry, food and beverage services (hospitality) is ranked number one by a considerable margin due to the multiple challenges it currently faces: from labour shortages to price hikes to lower consumer demand.

Credit enquiries were up a massive 129% year-on-year in January, following an uptick that began in October — a likely consequence of the Optus and Medibank data breaches.

External administrations were trending upwards until their seasonal drop in January, but are expected to show a continuation of the upward trend in the February Business Risk Index.

Key Business Risk Index insights for January:

• B2B trade receivables are at their lowest point since CreditorWatch began collecting this data in January 2015.
• Trade payment defaults are up 39% year-on-year.
• Credit enquiries are up 129% year-on-year.
• External administrations are expected to continue trending upward this year.
• Court actions are at their highest point since September and are up 36% on January 2022.
   

Yarra Ranges in Victoria is the region with the lowest insolvency risk (across regions with more than 5000 businesses), followed by Cottesloe-Claremont in Western Australia.

CreditorWatch CEO Patrick Coghlan said that the January Business Risk Index results clearly indicate a tough year ahead for Australian businesses.

“The upward trend in trade payment defaults, in particular, should definitely be of concern to business owners,” he said.

“The RBA’s tightening of monetary policy is beginning to bite, on top of other challenges like labour shortages and supply chain disruptions. We will hopefully see inflation peaking soon, followed by an improvement in business and consumer confidence. It is important to remember that the Australian economy is still in a much better position than most.”

CreditorWatch Chief Economist Anneke Thompson said trade receivables and trade default data provide a strong indication that we are now well past the peak of business conditions.

“This is in line with NAB’s latest Business Conditions survey, which also shows business conditions and confidence falling,” she said.

“While 2023 will certainly be a tougher trading environment for businesses than 2022, we are coming off a period where many businesses were operating at or close to capacity, and the RBA is looking for a slowdown in activity to cool inflation.

“One of the likely results of this slowing of business activity is rising unemployment. Again, employment conditions have been extremely tight, so any rise in the unemployment rate will likely still see the rate at very low levels in overall terms. It will also dampen wage growth, something the RBA Is very keen to keep at moderate levels so as not to induce a wage-price spiral."

Outlook

The outlook for 2023 has worsened upon the most recent increase to the cash rate which, while expected, was coupled with a very downbeat tone by the RBA in its accompanying statement and included an expectation of further Increases to the cash rate.

While many individuals and businesses had priced in at least one further rise to the cash rate, two more will present real serviceability problems to small businesses, particularly those in areas and sectors where demand is likely to drop, or already dropping.

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