Insolvency Australia is reporting that an increasing number of SME businesses are entering unchartered waters that could lead to more corporate and personal insolvencies. IA Director, Gareth Gammon, said that whether or not the country goes into a recession, the economic outlook and a resumption of debt collection efforts by the ATO could mean the end for many businesses.
Gammon noted that as the cash reserves of SMEs became depleted thanks to the pandemic and other factors, these businesses would be unable to bear the pain threshold. He highlighted the plight of construction businesses that were in a crisis state and those in the hospitality segment that were still trying to recover from lockdowns and staff shortages. Businesses in the retail sector were also found to be struggling as consumers opted to be more careful in their spending.
ASIC statistics indicate that there were 6,483 insolvency appointments in the 2021-22 period. This was 7% more than the previous year but still considerably lower than pre-pandemic levels which would have been around 10,000 to 11,000.
The RBA’s Financial Stability Review for October 2022 also cast a dim light on the economy, noting that with higher inflation and rising interest rates, there were borrowers with low savings and high debt levels who would find it difficult to keep up with their debt payments.
The report said that with income levels having failed to keep up with inflation, there would be more households left unable to service their debts. This impact would however be less so for those that managed to build up savings over the pandemic and cut back on spending or saving in the time being. The report however found that banks remained well-capitalised and with low loan arrears. As global financial conditions tighten, the resilience of households and businesses is expected to be tested.
Globally, Allianz Trade analysts predict that the insolvency index will increase from 8% to over 10% in the third quarter, compared to the same period last year. Commodity prices across the world remained high thanks to the effects of the war in Ukraine and supply chain problems from China. According to the analysis, about 50% of countries are experiencing double-digit increases in YTD business insolvencies for the first quarter of 2022. Australia was noted for being amongst the highest in increases at +104% in September, alongside India which recorded +64% growth in June, and Singapore at +42% growth in August. Europe is also adversely affected with insolvencies having risen to pre-pandemic levels in about 60% of industries.
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