CreditorWatch CEO Patrick Coghlan says the May data on defaults and insolvencies is encouraging but some sectors remain under pressure.

“This levelling off of insolvencies has been long awaited and is very welcome but we need to remember that several industries still face significant challenges, particularly those exposed to discretionary spending.

“Post-COVID, we’ve seen inflation hit 30-year highs. Those rapid price increases across the economy don’t reverse when the inflation rate comes down again – the higher prices are locked in and remain as permanent pressures for businesses. They’re generally passed on to consumers, but this is very difficult for businesses in sectors such as hospitality. If the price of a sandwich at a café goes up by three or four dollars, people can very easily go elsewhere or bring their lunch from home.

“We won’t see conditions improve sustainably for businesses in discretionary sectors until consumers see their wages grow ahead of costs for some time.”

CreditorWatch Chief Economist Ivan Colhoun says, the Fair Work Commission’s decision to increase the National Minimum Wage from 1 July 2025 will benefit consumers but apply further pressure on businesses, particularly in Retail and Hospitality.

“The good thing is that we will likely see these funds recycled into the economy. Interest rate relief by the RBA, as inflation has moderated, should also improve cash flow a little for both consumers and businesses alike.

“One aspect we are watching as insolvencies pressures switch from Construction and Hospitality to other services sectors, is whether there is the possibility for greater impact on the broader macro-economy. A striking feature of the prior rise in insolvencies has been the degree to which small companies, particularly those employing less than five people and sole traders have been impacted.”

ANALYSIS OF HIGHEST RATES OF ARREARS

The challenges of the Construction and Hospitality sectors are well known and unsurprisingly are also reflected in elevated levels of arrears. Electricity, Gas, Water and Waste Services occupies the second highest level of arrears, which may be somewhat surprising given the essential nature of many of these services. While insolvencies in this sector remain relatively low, they have risen a little in recent times.

On closer inspection, the elevated level of arrears and moderate uptrend in insolvencies appears to reflect some of the pressures also afflicting the Construction and Hospitality Sectors. Two sub-sectors, Waste Services and Solar Installers have been under pressure, likely reflecting the combination of the softer residential construction cycle along with perhaps some more cautious consumer attitudes.

Looking ahead, the beginning of the rate cut cycle suggests the challenging conditions in these sub-sectors should begin to ease over the next six to 12 months as residential construction begins to recover.

CreditorWatch CEO Patrick Coghlan says hospitality businesses are particularly vulnerable in several key areas.

“First, and most significantly, they are exposed to the vagaries of discretionary spending,” he says. “So, when households feel the pinch from interest rate rises and price increases, they typically spend less at places like cafes, restaurants, bars and pubs. The increase in people working from home has also had an impact, mainly in outlets in CBD areas.

“On top of that you have the business cost increases in areas such as wages, electricity, insurance and food and alcohol.

“You also have to remember that most hospitality outlets are small businesses, so they usually don’t have the cash buffers to get them through hard times that large businesses often do. I really feel for them – it’s tough right now. There are many businesses out there barely hanging on.

“We don’t expect a major turnaround for the sector until households feel the impacts of at least a couple of further rate cuts in their budgets.”

CreditorWatch Chief Economist Ivan Colhoun says, “We hear so much about the cost-of-living crisis, but it’s a ‘cost of doing business crisis’ as well, with businesses having seen significant increases in their cost bases.

“Businesses exposed to discretionary spending experience the worst of both worlds, with their costs pressured and their customers’ demand weakened. Hopefully the recent interest rate cuts by the RBA can build on the beneficial effects of last year’s income tax cuts and cost-of living support.”

On a state-by-state basis, hospitality businesses in South Australia have been the hardest hit, while businesses in Tasmania have been more resilient than in other states and territories. Both states have seen relatively favourable rates of return to work, with South Australia also recording very strong population growth in recent years.

South Australia is currently recording the lowest level of consumer confidence of any state, while the NAB Survey sees South Australian businesses recording relatively weak business conditions as well.

CreditorWatch CEO, Patrick Coghlan says the data on business closures shows how desperately Australian households need cost-of-living relief.

“As the cost-of-living crisis drags on we are seeing a bigger and bigger impact on all businesses, but particularly those that rely on the discretionary spending of consumers. Households don’t have many levers they can pull to save extra money, but they can certainly reduce costs in areas such as entertainment spending, retail purchases, services such as cleaners and gardeners and, on a larger scale, put off building a new house.

“We particularly feel for small businesses that typically have smaller cash buffers than larger businesses and are less able to take measures to cut costs such as laying off staff or closing locations.”

INSOLVENCIES REBOUND AFTER LATE 2024 DROP

Insolvencies remained elevated in March, broadly unchanged on February levels, but 17% higher than in March 2024. As a share of total company registrations – to account for the rise in the number of companies – insolvencies are well above pre-COVID rates.

At the same time, the share of insolvencies remains at the lower end of the range that was typical over the 2002-2012 period. The impact of cost-of-living and cost-of-doing business increases, along with accumulated taxes owed to the Australian Taxation Office, appear to be the dominant drivers of elevated insolvencies at the current time.