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Hospitality sector bears the brunt of economic caution

Business closures in Australia have now hit a four-year high, driven by rising cost-of-living pressures.

According to data from debt-monitoring firm CreditorWatch, the business failure rate climbed to 5.04% in October, the highest since October 2020 during the COVID-19 pandemic peak of 5.08%.

Annually, insolvency rates were approximately 25% higher than pre-pandemic levels.

CreditorWatch highlighted three key factors contributing to these insolvencies: escalating living and operational costs and intensified efforts by the Australian Taxation Office to recover $35 billion in unpaid tax debts.

"When you talk about the cost of doing business, a lot of smaller businesses face the same sort of pressure that consumers do with electricity prices, insurance, rentals, [and] minimum wage increases, so they've also seen their costs of doing business go up a lot," Ivan Colhoun, CreditorWatch's chief economist, said.

"Together with some greater caution in discretionary spending and softness in interest-rate-sensitive sectors of the economy, this unsurprisingly has led to higher voluntary business closures and some rise in insolvencies."

The hospitality sector has borne the brunt of economic caution, recording the highest rate of business insolvencies in the year to October, with an average failure rate of 8.5%. CreditorWatch forecasts this figure will rise to 9.1% over the next 12 months.

For many cafes and restaurants, passion alone isn't enough to keep the doors open, as rising costs and declining demand continue to strain the industry.

Construction is also suffering.

The hospitality and construction sectors reported the highest number of businesses with tax debts and the greatest rate of tax defaults, further undermining their financial stability. According to the report, business-to-business payment defaults have continued to climb, with arrears rising across most industries, signalling increasing struggles for businesses to meet their financial obligations, including payments to suppliers.

Colhoun noted that the uptick in arrears is "not surprising," given the rising costs of doing business and the high-interest-rate environment. "Unfortunately, this often leads to increased arrears and, in some cases, business failures," he said.

Businesses won’t be able to rely on interest rate cuts any time soon either.

The Reserve Bank of Australia (RBA) is unlikely to lower interest rates at its final meeting of the year on December 9–10, maintaining the cash rate at 4.35%. Economists expect the first rate cut in the first half of 2025.

Annual inflation eased to 2.8% in the September quarter, with unemployment steady at 4.1% in October. However, high business closure rates continue to challenge the economy, according to CreditorWatch.

Colhoun noted that while labour demand remains strong and large business failures are limited, the RBA requires either lower inflation or higher unemployment to justify rate cuts. He cautioned that lower inflation won’t reduce prices but may ease household cost-of-living pressures and boost consumer spending.

Colhoun also highlighted early signs of economic improvement, such as rising consumer and business confidence, potential retail sales growth, and July tax cuts supporting the economy. Yet, he warned that improving confidence may not immediately reduce business closures.

Global uncertainties add to the challenges, including potential tariff increases proposed by the new US administration. These factors could create significant risks for businesses in the months ahead, complicating the outlook for economic stability and growth.

 

 

Jonathan Jackson, 20th November 2024