The number of businesses falling into administration spiked in July as economists warn inflation and rising interest rates are pushing the local economy towards an ominous “turning point”.
CreditorWatch figures published on Wednesday revealed external administrations soared 46 per cent year on year last month, with food, recreation and telecommunications firms hardest hit.
The number of administrations has soared 50 per cent since April.
Anneke Thompson, chief economist at CreditorWatch, said the rises are being driven by an ongoing return to pre-pandemic insolvency rates and Australia’s rapidly souring economic outlook.
“The cost of debt and inputs like labour have all skyrocketed,” she said.
“[With] consumer confidence declining and inflation and interest rates on the rise, this doesn’t bode well for business, particularly SMEs [small and medium enterprises].”
The figures are the latest foreboding sign for the Australian economy, which is increasingly being battered by global headwinds as major markets like the United States and United Kingdom flirt with recession.
But economists still think such a downturn is unlikely in Australia, suggesting the strong jobs market will help the nation weather the storm better than other nations.
“We’re clearly somewhere near a turning point,” economist Saul Eslake said.
“The chance of a recession in Australia isn’t zero … but I don’t think it’s higher than one in four.”
Signs of downturn?
External administrations have now risen for the past three months in a row, but are still below rates in 2018 in what Ms Thompson said is an ongoing return to pre-COVID insolvency rates.
She said the figures will need to be closely watched in coming months as another “steep rise” would indicate economic conditions were pushing swathes of firms to the brink of collapse.
BIS Oxford senior economist Sean Langcake agreed, saying that while the insolvency figures “obviously aren’t good news” they’re “not a doomsday type thing”.
“We’ve boomed out of the pandemic with huge policy support in place. There’s a natural period of adjustment where things pull back a bit,” he said.
And while more businesses are collapsing, others are more confident. National Australia Bank data on Tuesday revealed conditions have rebounded to a 13-month high after a June slump.
“The good news is that businesses are more confident,” CommSec’s Craig James said.
“The bad news is that Aussie businesses have hit the ceiling … the hard part is finding and paying for the extra workers and materials.”
Big economies face recession
With such conflicting reads on business conditions, Mr Eslake said economists will be watching to see whether insolvencies continue rising in coming months as interest rates continue rising.
“If it were to continue rising to levels considerably higher than they were in 2015-16 that might well presage a more serious downturn,” he said.
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Experts remain circumspect about the risk of a recession in Australia in late 2022 as interest rates continue rising, with Reserve Bank boss Philip Lowe conceding there’s a “narrow path” between subduing soaring inflation and spurring an economic downturn across the nation.
Those fears have been heightened in recent weeks as the US fell into a technical recession with two quarters of negative real GDP growth, while the Bank of England has now forecast an extended recession in the UK.
But experts said Australia should fare better than those countries because the unemployment rate remains near a record low at 3.5 per cent, while inflation is also much higher overseas.
“I can’t reconcile us going into a recession with an unemployment rate that’s materially below 4 per cent,” Mr Langcake said.
“Most people’s central forecast for the economy is far enough away from zero quarter to quarter that we can weather a bit of a negative shock more [than other nations].”
