The number of businesses falling into administration rose in July as economists warn inflation and rising interest rates are pushing the local economy towards a worrying ‘turning point’.
CreditorWatch figures released on Wednesday revealed that external government soared 46% year-on-year last month, with food, leisure and telecommunications companies hardest hit.
The number of administrations has increased by 50% since April.
Anneke Thompson, chief economist at CreditorWatch, said the increases were driven by a continued return to pre-pandemic insolvency rates and Australia’s rapidly deteriorating economic outlook.
“The cost of debt and inputs like labor have all skyrocketed,” she said.
“[With] with consumer confidence falling and inflation and interest rates rising, this does not bode well for businesses, especially SMEs [small and medium enterprises].”
The figures are the latest worrying sign for Australia’s economy, which is increasingly battered by global headwinds as major markets like the US and UK flirt with recession.
But economists still think such a slowdown is unlikely in Australia, suggesting the strength in the jobs market will help the country weather the storm better than other nations.
“We are clearly somewhere near a turning point,” said economist Saul Eslake.
“The probability of a recession in Australia is not zero…but I don’t think it’s more than one in four.”
Signs of slowing down?
External administrations have now risen for the past three consecutive months but are still below rates in 2018 in what Ms Thompson said was a continued return to pre-COVID insolvency rates.
She said the figures will need to be watched closely in the coming months as another “sharp rise” would indicate economic conditions were pushing swaths of businesses to the brink of collapse.
Sean Langcake, senior economist at BIS in Oxford, agreed, saying that while the insolvency figures “obviously aren’t good news”, they are “not an apocalyptic type thing”.
“We came out of the pandemic with huge political support in place. There is a natural period of adjustment where things go back a bit,” he said.
And while more and more companies are collapsing, others are more confident. Data from National Australia Bank showed on Tuesday that conditions rebounded to a 13-month high after falling in June.
“The good news is that businesses are more confident,” said Craig James of CommSec.
“The bad news is that Australian companies have hit the ceiling…the hardest part is finding and paying for the extra workers and materials.”
Major economies facing recession
With such conflicting readings on trading conditions, Eslake said economists will be watching whether insolvencies continue to rise in the months ahead as interest rates continue to rise.
“If it were to continue to rise to levels significantly higher than in 2015-16, that could well portend a more serious downturn,” he said.
Experts remain wary of the risk of a recession in Australia at the end of 2022 as interest rates continue to rise, with Reserve Bank boss Philip Lowe conceding there is a “narrow path” between containing the soaring inflation and spurring an economic downturn across the country.
These fears have intensified in recent weeks as the US has entered a technical recession with two quarters of negative real GDP growth, while the Bank of England now forecasts a prolonged recession in the UK.
But experts said Australia should fare better than those countries as the unemployment rate remains near a record high of 3.5%, while inflation is also much higher overseas. .
“I can’t reconcile us to a recession with unemployment significantly below 4%,” Langcake said.
“Most people’s central forecast for the economy is far enough away from zero quarter-over-quarter that we can withstand a negative shock more [than other nations].”