Insolvencies spike to decade high-levels
By the end of the financial year, the number of companies entering external administration is expected to exceed 10,000, a level not seen since 2012-13.
In a clear sign of economic distress, Australia is now seeing a surge in business insolvencies, with approximately 1,100 insolvencies in March alone – the highest monthly figure since 2015.
In the March quarter, around 2,600 businesses entered an insolvency process, 41% higher than the same quarter last year. The Australian Securities and Investments Commission (ASIC) predicts that by the end of the financial year, the number of companies entering external administration will likely exceed 10,000 – a level not seen since 2012-13, in the aftermath of the Global Financial Crisis.
One of the key factors contributing to this surge in insolvencies is the Australian Taxation Office (ATO) pursuing debts that were previously put on hold during the COVID-19 pandemic. According to the ATO, collectable debt rose 89% in the four years to June 2023. This has particularly impacted small businesses, as they account for approximately 65% of the total debt owed to the ATO (around $33 billion).
But more strictly enforced debt collection is coming at a time of tough economic conditions. High interest rates and cost-of-living pressures have weakened consumer spending, particularly in more discretionary components of spending. According to ASIC, the construction and accommodation & food services sectors represent the largest proportion of company failures, making up approximately 27.7% and 15.2% respectively.
Chart 1: Number of insolvencies monthly and quarterly average from 2021
Source: Australian Securities and Investments Commission
The construction sector has been hit particularly hard, with construction firms leading industry insolvencies in every quarter since mid-2021. They have accounted for approximately 25% of all insolvencies during this period. The residential construction sector is already facing a backlog of projects to complete as a result of skills and material shortages in recent years, and increased insolvencies in the sector may only exacerbate the problem of housing shortages.
The food & accommodation sector has also experienced a wave of insolvencies. High input costs, worker shortages, and weak consumer sentiment have put pressure on businesses. Specifically, in March, cafés, restaurants, and takeaway businesses accounted for 5.5% of total business insolvencies, the highest proportion in the last three years.
However, while the absolute number of insolvencies is high, the number of companies entering external administration as a share of total registered companies is still lower now (0.33% ) than in 2012-13 (0.53%). This reflects the increase of registered companies in Australia, which has risen from just over 2 million to 3.3 million since 2012-13.
Even so, the continued lift in insolvencies since 2021 highlights the difficult conditions many businesses face at present.
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This newsletter was distributed on 29th May 2024. For any questions/comments on this week's newsletter, please contact our authors:
This blog was co-authored by Amy Kerrigan, Graduate Economist at Deloitte Access Economics
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