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Small businesses should brace for a lacklustre recovery and a worse-than-expected surge in insolvencies if the nation’s “phantom” lockdown continues, according to an economic outlook report.
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‘Phantom’ lockdown risks surge of insolvencies
06 March 2022
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CreditorWatch has released its latest economic outlook report revealing that Australia’s recent “phantom” lockdown caused an increase in insolvencies in 2022.
“It’s going to be a slow recovery,” CreditorWatch chief executive Patrick Coghlan said.
“We’re in the middle of a phantom lockdown and the uncertainty is delaying a lot of key initiatives like hiring, investment and returns to the office. Small businesses are the backbone of the economy and they are hurting.”
Australia’s economy was recovering strongly leading into the end of 2021, but then the omicron variant forced a wave of fresh restrictions and prompted many to cancel plans, according to CreditorWatch.
While restrictions are easing, many consumers and businesses are maintaining self-imposed lockdowns. Omicron has already been felt strongly in credit indicators, with the January 2022 CreditorWatch Business Risk Index showing the economy is falling short of a sustainably strong recovery, with trade receivables in the January quarter plunging 45 per cent compared with the previous corresponding period, and now 50 per cent lower than pre-COVID levels.
Court actions surged 58 per cent and credit inquiries fell 12 per cent in the three months to January 2022, a move at odds with a strong short-term economic bounceback.
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CreditorWatch chief economist Harley Dale said that omicron has ripped through Australia’s economic recovery.
“The Omicron variant smashed the expectations of many SMEs and generated a reticence for households to get out and about,” he said.
Mr Coghlan said if the recovery faltered Australia would see a large number of insolvencies and that would have a domino effect, heaping pressure on other businesses up and down the supply chain.
“The supply chain itself is struggling and this also adds to the challenges businesses are facing, even those businesses in seemingly strong periods of prosperity,” he warned.
Economy facing raft of risks
The report said the Australian economy should still recover in 2022, but not as quickly as first hoped.
A positive is that, despite the omicron impact, the Australian economy is in a solid position and primed to bounce back if conditions improve.
“If Covid restrictions are lifted and we return to a pre-Covid state of play in the short term, the outlook for the Australian economy is positive,” James O'Donnell, managing director of Open Analytics said.
“Household cash and cheap credit, combined with a public that is able and willing to spend, will invariably result in favourable conditions for business.”
But along with the prospect of an ongoing post-omicron phantom lockdown, businesses face a fresh round of risks in 2022 including supply chain issues, inflation, the looming federal election and interest rate rises.
Mr Coghlan said interest rate uncertainty is muddying the waters.
“After months of RBA announcements that rates wouldn’t rise, we have seen that change very quickly,” he said.
“Small businesses often use their properties as collateral. If they have an increased mortgage this means less money in their pocket – at this level, the consumer and business are one and the same.”
Business insolvencies rise as collection normalises
Whether or not these negatives hijack a recovery, business insolvencies are set to rise in 2022. Mr O'Donnell said even in the best-case rapid reopening scenario there is a backlog of insolvencies that will wash through during 2022 as creditors resume normal collections activities.
According to the January 2022 CreditorWatch Business Risk Index, court actions jumped a massive 58 per cent in January 2022 quarter, a strong indication that large creditors such as banks and the ATO have resumed regulator collection activity.
“We are in for a bumpy ride,” Mr Coghlan said. “Policymakers need to provide more clarity and remove the uncertainty. And we need to learn to live and work in a Covid world – we’re not nearly comfortable with it yet.”
CreditorWatch’s data is now pointing to economic activity in Australia running at a much slower rate than desired.
Mr Dale said that policymakers need to be flexible and nimble in response to an evolving environment that should be marked by an accelerating economic recovery.
“If that isn’t the economic outcome, then the federal election in May won’t help and the lack of cohesion to the national cabinet process will be further exposed,” he added.
“For the hundreds of thousands of SMEs, regardless of whether an economic recovery proves sustainable or not, policy needs to get better.”
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