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Adverse economic conditions will lift insolvency rates by the end of 2022, says the latest CreditorWatch report.
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Business confidence ‘teetering on the brink’
13 July 2022
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Business confidence is teetering on the brink with default rates and court actions back to pre-pandemic levels and the full impact of adverse conditions due to hit in the fourth quarter, according to the latest CreditorWatch report.
Key indicators, such as trade receivables and trade payment defaults, are heading the wrong way it said while an “unfortunate economic cocktail” is likely to lift insolvency rates over the rest of 2022.
“CreditorWatch forecasts that multiple adverse impacts will continue to batter the economy over the coming months, likely to cause a rise in business insolvencies throughout 2022,” the credit agency said in its June Business Risk Index.
“The acceleration of default rates is also likely to climb with the deteriorating economic outlook.
“This is exacerbated by the severe pressures associated with inflation and interest rate rises, increasing COVID-19 cases and subsequent labour shortages.”
The report forecasts average business default rates will hit 5.8 per cent over the next 12 months with the potential for them to go higher. The food and beverage services sector is the most at risk, with a 7.1 per cent likelihood of default, followed by arts and recreation then education and training.
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CreditorWatch chief executive Patrick Coghlan said the signs were clear that businesses were facing headwinds with trade receivables down 18 per cent year-on-year while trade payment defaults were up 18 per cent.
“We continue to see a disturbing rise in trade payment defaults, our leading indicator for future business insolvencies,” he said. “Court actions are also back to pre-COVID levels, reflecting that the banks are back to their regular collection activity after the ‘loan holidays’ that they provided during the peak of the pandemic.”
CreditorWatch chief economist Anneke Thompson said businesses had been operating at capacity levels but economic conditions, such as access to finance, were deteriorating.
“Businesses will be increasingly wary of their credit customers and their ability to pay going forward, even if no problems have arisen to this point,” she said. “Businesses in the growth phase, who require equity or debt for growth, may now see these lines of funding get increasingly more difficult to source.”
The agency figures for business confidence would soon echo those for consumer confidence, which was “very low”, with the potential for it to flow through to the labour market.
“Right now, the jobs market is as tight as it’s ever been,” the report said. “But this could start to change soon if businesses take a more cautious approach to investment and growth. Especially if they are linked to retail, housing, construction or finance, and they know that by the end of the year their pace of growth will have slowed considerably.”
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