The Omicron outbreak and government changes to lending legislation haven't helped ease the nerves of either consumers or businesses
Companies are being urged to chase up debtors and keep a close eye on their cash flow, as new data suggests more are struggling to pay their bills.
The Centrix Credit Indicator Report for March 2022 suggests business credit defaults in the retail sector were up 19 percent for the month, compared to the same period last year.
Other industries are also seeing an uptick in credit defaults. In tourism they are up 12 percent, in hospitality it's 9 percent and in construction 3 percent.
However, some other sectors actually saw a decline in credit defaults, with financial services dropping by 8 percent, manufacturing by 15 percent, and education by 22 percent.
Centrix managing director Keith McLaughlin says it's vital businesses keep a close eye on their cash flow and debtor ledger in the current environment to ensure they're not left out in the cold, waiting to be paid.
“If debtors are slow paying you on time, that impacts your cash flow and you can’t pay your suppliers. You get a chain reaction where one [business] doesn’t pay, and the next can’t pay,” he says.
“You can't afford to take your eye off the ball. Just because you’ve sold a product or you've done some work somewhere doesn’t mean to say you've got money in your bank. You’ve got to know who your customers are, and follow them up to make sure you get paid.”
Retail NZ chief executive Greg Harford says it comes as no surprise retailers are struggling with cash flow.
“The past two years have been tough and the recent Omicron outbreak means foot traffic and consumer confidence is down significantly,” he says.
Many retailers have not met targets in the last few quarters, meaning cash flow is limited.
There have been steady sales in some parts of the sector, but the impact of inflation and increasing business costs means margins are eroded and companies are making little profit, Harford says.
“To cope with these pressures and the uncertain operating environment, retailers have signalled they will continue to increase prices, and limit operating and staff hours,” he says.
These concerns around business margins and cash flow are mirrored in a survey of organisations carried out by fintech firm Prospa, which provides small business loans.
The poll of 525 small businesses carried out in February 2022 found 45 percent of respondents rated maintaining profit margins as their biggest concern, particularly those running goods-based businesses.
Prospa’s managing director Adrienne Begbie says certainty and demand for business loans go hand in hand.
Lockdowns, alert level changes, and other announcements all caused business confidence to wobble. Begbie says this was evident as recently as last week, when the Government finally said it would be dropping vaccine passes.
“As soon as [the Government] comes out with that kind of announcement, everyone goes ‘Cool, now we know what we need to do or we've got the confidence, we can move forward’."
Home loan demand drops with consumer confidence
Meanwhile, the Centrix Credit Indicator Report for March also shows consumer and commercial confidence has shrunk since the start of the year. Demand for consumer credit is tracking downwards 9 percent year-on-year, and the number of businesses seeking credit is down 5 percent.
“Omicron and inflation pressures appear to have hit consumer confidence, with many Kiwis uncertain about the future of the pandemic and the long-term expectations on discretionary spending,” the credit rating firm says.
The report shows conversion rates for all loan types have dropped since late last year, meaning fewer people are actually getting and using the funds they apply for.
The sharpest drop is seen in credit card applications in the last three months, from about 30 percent in December 2021 to roughly 20 percent in February 2022.
For home loans, the conversion rate dropped from 38 percent to about 34 percent over the three-month period.
Centrix managing director Keith McLaughlin says it's unlikely to be coincidence that this decline coincides with the changes to the Credit Contracts and Consumer Finance Act (CCCFA) in December - changes which saw banks overzealously scrutinise would-be lenders' spending history and creditworthy borrowers refused loans.
Fewer people are seeking mortgages, according to the Centrix data, with applications down 19 percent year-on-year. The report attributes this stifled demand to falling house prices combined with lower sales, rising numbers of listings, inflation pressures, rates hikes and new lending restrictions.
Kiwibank senior economist Jeremy Couchman says the lower consumer confidence matches up with the chilling effect of the Omicron outbreak, coupled with the CCCFA changes.
“Some of it is that people are finding it harder to get access to credit, but then there's the story of that confidence on the consumer spending side. People might be confined to home [during the outbreak], or not really wanting to go out and splurge on big ticket items.”
The weakened demand for credit is set against the wider backdrop of the housing market.
“We have a housing market which is showing signs of falling prices,” Couchman says. “Some people just don't want to get involved in the market as they're worried they may get burnt with falling house prices. If you're a developer, you may be worried you might not be able to make as much of a profit if prices are falling.”
