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Persistent interest rate rises and lingering high inflation mean companies and consumers are feeling the squeeze.
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Business payment defaults reach record high
12 July 2023
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Business payment defaults jumped in June to reach a record high driven by tightening monetary policy, according to CreditorWatch’s latest Business Risk Index released today.
The monthly index revealed trade payment defaults rose 52 per cent year-on-year to hit 1,586 in June, the highest figure since March 2019.
The firm said the increasing stress on businesses contributed to the landmark level and forecast a rise in insolvencies and a national default rate of 5.76 per cent for the next 12 months, up from the current 4.71 per cent.
CreditorWatch said companies with a payment default lodged against them by a single trading partner had a 26 per cent chance of insolvency in the next 12 months. This rose to 45 per cent for businesses with two payment defaults and reached 65 per cent when it had defaults lodged by three or more trading partners.
CreditorWatch CEO Patrick Coghlan said the RBA’s interest rate rises were a main reason for the default increase.
“The impact of the rate rises, as well as high inflation, is increasingly being felt by businesses as consumers tighten their belts,” said Mr Coghlan.
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“Forward orders are going down as the demand falls away and both business and consumer sentiment is in rapid decline.”
“Thankfully, many businesses emerged leaner and more efficient in the wake of the pandemic after trimming fat and investing in technology, which bodes well for the tough conditions now and in the months ahead.”
CreditorWatch said the record rate of trade defaults was due to businesses tightening their cash flow processes after feeling the pinch from restrained consumer spending and increased costs.
The firm said the elevated trade defaults meant the economy had reached a point in its cycle where consumer pain was being felt by businesses and hindering demand.
Declining discretionary spending meant food and beverage services were most at risk of default, followed by transport, postal and warehousing.
CreditorWatch chief economist Anneke Thompson said the pause in the tightening of the monetary policy was warmly received by businesses.
“Inflation is still too high, evidence from overseas also tells us that core inflation is proving sticky, and labour markets are still too tight,” said Ms Thompson. “The RBA has succeeded in slowing consumer spending for goods and reducing inflation in this area, however, consumers alone can’t bring down inflation.”
“A slowdown in business investment and hiring is now needed to further drive inflation down. For this reason, the RBA will be closely monitoring job vacancy and labour force data for signs that their policy intervention is flowing through to the business side.”
“Our June BRI data strongly suggests that businesses are absolutely tightening their belts.”
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