While it’s great news that the latest CreditorWatch Business Risk Index figures show positive business recovery in some regions and industries, the hospitality, transport and the arts sectors are still struggling under the pressures of the pandemic and inflation, with a marked surge in defaults this month causing concern.

As we head into the final quarter of the 2021/22 financial year, the latest CreditorWatch Business Risk Index results indicate positive signs for business recovery, with B2B trade activity up 55 per cent on its January low and credit enquiries up 45 per cent over the last quarter.

However, trade payment defaults and court actions continued to rise in March, signalling an increase in business insolvencies in the short to medium term.

Of most concern is the hospitality sector, which has seen a significant surge in the probability of default, leaping from 6.7 to 7.2 per cent from February to March.

Default figures surging

The hospitality sector has been hit particularly hard, with self-imposed lockdowns among consumers, ongoing staff shortages due to COVID, and rising costs due to supply chain shortages and fuel price increases creating a ‘perfect storm’ for the industry.

Given that hospitality spend is viewed as ‘discretionary’ spending, it is expected to suffer further when rising inflation and interest rates prompt consumers to tighten their belts. Interest rate increases may also force some smaller landlords to raise commercial rents, bringing further pressure to bear on hospitality businesses.

The arts and recreation and transport industries both saw their probability of default increase by 0.3 per cent, moving into second and third highest risk industry rankings respectively.

Source: CreditorWatch RiskScore Credit Rating Average Probability of Default by Industry

The industries with the highest probability of default over the next 12 months:

• Food and Beverage Services: 7.2 per cent
• Arts and Recreation Services: 4.9 per cent
• Transport, Postal and Warehousing: 4.8 per cent

According to the Business Risk Index March report, some regions are more susceptible to current pressures and businesses are at higher risk of default.

Regions most at risk of default over the next 12 months:

• Bringelly – Green Valley (NSW): 7.83 per cent
• Merrylands – Guildford (NSW): 7.80 per cent
• Gold Coast – North (QLD): 7.67 per cent
• Canterbury (NSW): 7.57 per cent
• Surfers Paradise (QLD): 7.47 per cent

Regions at least risk of default over the next 12 months:

• Wheat Belt – South (WA): 3.48 per cent
• Glenelg – Southern Grampians (SA): 3.56 per cent
• Mid North (SA): 3.67 per cent
• Murray River – Swan Hill (VIC): 3.70 per cent
• Esperance (WA): 3.71 per cent

CreditorWatch expects that the true picture around defaults will be clouded by the banks and ATO taking a ‘hands off’ approach to payment collections to assist businesses to recover. However, it’s expected that defaults will rise considerably once collections resume.

Inflation concerns already taking effect

CreditorWatch CEO Patrick Coghlan says that while the increase in trade receivables and credit enquiries are very encouraging signs, the rises in trade payment defaults and court actions were of concern.

“It’s great to see some signs of recovery, and like the rest of the business community, I truly hope this can be sustained. However, I remain cautious about the timeframe for trade activity to return to pre-COVID levels. There is still so much uncertainty out there, and with inflation on the rise and interest rate increases looming, consumers may be reluctant to open their wallets too much.”

In fact, CreditorWatch Chief Economist Anneke Thompson says that inflation is the key threat to Australia’s economic outlook.

“Notably, inflation is rising because of supply side issues – supply chain bottlenecks, high fuel prices, New South Wales/Queensland floods and staffing shortages – rather than particularly high demand,” she says.

She adds that given the market is already pricing in inflation and cash rate rises, consumers have responded.

“The Westpac Consumer Sentiment Index has been in decline since November 2021. While the index is not low by historic measures, the decline certainly gives us reason to believe that consumers and businesses are already factoring in cost rises and future interest rate rises in their purchasing decisions.”

Overall outlook “challenging”

The March Business Risk Index highlights that those industries exposed to discretionary spending and fuel costs have seen their risk of default increase quite significantly. Any sector where consumers can substitute their purchasing choice – for example, eating meals at home instead of eating out, watching movies at home instead of going to the cinema – is at increased risk in this inflationary environment.

According to CreditorWatch, “The overall outlook for Australian businesses is looking quite challenging. Businesses will need to be focused on cost pressures and maintaining margins, while also ensuring that they can induce demand for their products and services as consumers tighten their belts. It won’t be easy.

“More open borders may help to alleviate staffing pressures, but an impending decision by the Fair Work Commission on the minimum wage from July 1, 2022, will partly set the scene on what wage pressures businesses will be under going forward.

“Add to this cash rate increases – likely around mid-year – and we have conditions set to see continued inflation. For many Australians, this will be their first experience of dealing with inflation and rising home loan rates, so the threat to consumer and business confidence could be quite dramatic.”

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