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The mood has turned sharply pessimistic among those on the frontline, a KordaMentha survey finds.
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70% of turnaround experts expect recession within a year
17 August 2023
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Seven out of 10 turnaround professionals expect Australia to be in a recession within 12 months in a sharply pessimistic change of mood since last year, according to a survey by KordaMentha and Turnaround Management Australia.
Just 27 per cent thought a recession was likely in the previous Turnaround Survey, but this year industry sentiment had dipped to its lowest point since the study began as business predicted tough times ahead.
It said compared to the previous nadir in 2020 when the COVID-19 pandemic hit, this year’s sentiment was the “most bearish” yet.
“Access to debt and equity funding has largely dried up, construction businesses are entering administration, consumers are slowing spending, real estate valuations are declining, and costs and wages continue to rise,” it said.
KordaMentha executive director performance improvement James Wagg said business expected more financial distress and insolvencies as the economy returned to normal after the artificial stimulus from pandemic measures.
“The economy [is] getting back on a real world setting post-Covid which cannot be achieved without some pain,” he said.
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“The government subsidies followed by increased revenues have had a positive impact on profitability, which means many businesses have not been focusing on costs.”
The survey showed almost eight out of 10 respondents thought inflation would remain at current levels or increase in the next 12 months, and 40 per cent said the impact on business would be “strong”.
Rising costs and wages were the main pressures on business and sectors in the front line included those which struggled to pass on increases, such as construction, or were coping with weak demand, such as consumer discretionary and commercial real estate.
A majority of respondents also named cash flow, cyber security and recruitment as significant pressure points.
“Rising interest rates and inflation with resulting cost increases are causing a drop in discretionary spending and profitability,” Mr Wagg said.
“Wage increase decisions are causing pressure in service industries as well and increasing interest rates have made access to finance more difficult.
“The survey predicts an increase in insolvencies and merger and acquisition activity in the next year.”
Compared with last year, fewer thought businesses should focus on revenue growth but more believed closure or divestment of business units should be a priority, up to 80 per cent from 51 per cent.
But cost reduction emerged as the overriding issue for 84 per cent, against 59 per cent last year.
“Strong mergers and acquisitions activity since Covid has been from companies seeking to grow, prompted by buoyant conditions and the availability of low-interest funds.
“Now it’s the reverse. Companies will be seeking to contract, prompted by distress and the need to liberate capital or lower costs.”
“Construction was the first industry to be affected, unable to pass on rising costs due to fixed price contracts. We are now seeing other industries affected, like retail, impacted by increased cost of living and reduced consumer spending.
“The next are likely to be services industries such as health, as government funding fails to keep up with increasing costs. It’s trickling through the economy.”
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