While business activity is showing the green shoots of recovery from the pandemic, there remains the risk of increased insolvencies in the short to medium term, credit reporting agency CreditorWatch warns.
Releasing its monthly business risk report, it found court actions were at their highest since March 2021, while trade payment defaults are at their equal highest point since October 2020 – a leading indicator of rising insolvencies.
“I remain cautious about the timeframe for trade activity to return to pre-COVID levels,” CreditorWatch CEO Patrick Coghlan said.
“There is still so much uncertainty out there, and with inflation on the rise and interest rate increases looming, consumers may be reluctant to open their wallets too much.”
Other factors pointing to a bumpy economic outlook include COVID-related supply chain disruptions, labour shortages, fuel price rises and the impact of the floods along east coast Australia.
CreditorWatch believes the probability of default in the hospitality industry increased in March given it depends on discretionary spending, which is expected to suffer at the hand of rising inflation and interest rates.
Among the regions, flood-affected Lismore unsurprisingly showed a greater risk of default, although remains well below the national average.
CreditorWatch chief economist Anneke Thompson said inflation is the key threat to Australia’s economic outlook.
She said inflation is rising because of supply side issues – supply chain bottlenecks, high fuel prices, NSW/Queensland floods and staffing shortages – rather than particularly high demand,
While future cash rate rises look increasingly necessary to keep inflation within the target band, they are more effective at cooling consumers and investors’ appetite for borrowing.
“The RBA will be very wary of cash rate rises further fuelling supply side price rises, if businesses on thin margins choose to pass on higher borrowing costs to consumers,” she said.
Economists are predicting the Reserve Bank of Australia will start raising the cash rate from a record low 0.1 per cent in June.
The monthly Westpac-Melbourne Institute consumer sentiment survey for April is released on Wednesday.
The ANZ-Roy Morgan consumer confidence index released on Tuesday rose for a second week in a row as petrol prices retreated further below $2 per litre, but pessimists continued to outweigh optimists.
By Colin Brinsden, AAP Economics and Business Correspondent in Canberra, AAP
