Business stress broad-based

Ian Rogers

“The largest contraction since the pandemic began”: that’s the sobering assessment by CreditorWatch in the second instalment of its monthly Business Risk Index.

Business turnover “plummeted in October, down by 37 per cent on an annual basis, following a commensurate drop of 34 per cent in September,” CreditorWatch wrote in the overview of the BRI, published this morning.

“This is the largest contraction experienced since the pandemic began. Business turnover started falling on an annual basis back in October 2019, reinforcing what CreditorWatch has highlighted before - the Australian economy entered this pandemic in relatively poor shape.”

The Business Risk Index identifies the three sectors “most at risk in terms of payment defaults” as:
•    construction (12.4 per cent);
•    accommodation, food and beverage (11.1 per cent); and
•    transport, postal and warehousing (10.7 per cent).

For bank credit departments, these are discouraging, even if hospitality is well understood as traumatised by the now-completed cycles of frequent lockdowns in south-eastern Australia.

In a more typical cycle, construction and transport are classic leading indicators of a more broadly-based crisis and both, superficially, are perceived to be booming; or perhaps overall too many enterprises in these sectors are poorly managed.

The number of defaults economy-wide fell by 2.4 per cent in the month, falling by 11 per cent for the three months to October 2021. 

The nationality probability of default for October stands at 5.78 per cent, relatively flat compared to September (5.77 per cent).

“The data we’re seeing at the moment is atypical, given the banks’ and the ATO’s lenient attitude to debt collection through the pandemic,” CreditorWatch CEO Patrick Coghlan said.

“Eventually, this situation will normalise, and defaults, court actions and administrations will return to more typical pre-COVID levels,” he added.

CreditorWatch says its Business Risk Index is a “predictive economic indicator to help guide businesses when making future growth plans and inform public policy.” It is a new credit rating that ranks more than 300 Australian geographies by relative insolvency risk, providing unique insights into the health of Australian businesses by region. 

Each region is ranked from best to worst in terms of the potential for businesses in it to become insolvent. 

The index is calibrated by data from approximately 1.1 million ASIC-registered, credit-active businesses. It combines these insights with CreditorWatch’s proprietary data, previously published as the monthly Business Risk Review.