Bankrupt, bust or giving up: Businesses shutter at pandemic levels

Businesses are failing at the highest rate since the depths of the pandemic while Reserve Bank board members admit they are seeing signs of firms laying off staff as the economy struggles.

Figures to be released by credit data monitoring company CreditorWatch on Wednesday show more than one in 20 businesses across the country is failing as consumer spending dries up and high costs hit their bottom line.

The highest failure rates are in western Sydney and south-east Queensland.Credit: Bloomberg

The failure rate, which covers insolvency and deregistration, in the food and beverage sector climbed to 8.5 per cent in October, from 8.3 per cent the month before. CreditorWatch expects that figure to reach 9.1 per cent by mid-next year.

Failure rates are above 5 per cent across some of the largest employing parts of the economy, including construction, retail and accommodation.

Across all the economy, business failure rates have reached 5.04 per cent – up from 3.97 per cent last October. The national failure rate peaked at 5.08 per cent in October 2020, when many parts of the country were shut down due to the pandemic.

The highest failure rates are in western Sydney and south-east Queensland. In the Sydney suburbs of Bringelly, Merrylands, Canterbury and Bankstown, the failure rate is above 7.5 per cent.

Among CBDs, the highest failure rate is in Sydney at 6.24 per cent followed by Brisbane (5.9 per cent) and Melbourne (5.8 per cent).

The lowest failure rates are in parts of Adelaide and regional Victoria.

CreditorWatch chief economist Ivan Colhoun said businesses were facing the same cost pressures as consumers, including higher electricity, insurance and rental costs.

“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,” he said.

While businesses are struggling, there are signs the stage 3 tax cuts, easing inflation and real wage rises are starting to lift consumer sentiment. The ANZ-Roy Morgan weekly measure of consumer confidence rose again over the past seven days to be at its highest level since early 2023.

Consumers are more upbeat about their finances and the state of the economy while expectations about inflation are starting to ease.

Treasurer Jim Chalmers will use an address to parliament on Wednesday to argue the “emerging optimism” about the economy is warranted.

He will highlight a drop in inflation, to a three-year low of 2.8 per cent, a strong jobs market and real wages growth are all signs the economy is mending.

“We’re not pretending it’s mission accomplished – it isn’t. We are realistic about this, but optimistic, too,” he will say.

That optimism is being tempered by the Reserve Bank, which, since the government’s election, has lifted official interest rates 12 times, to 4.35 per cent.

Economists are expecting the RBA to start cutting rates between February and May while financial markets believe it could be even later.

Minutes of the bank’s November 4-5 meeting revealed it could cut rates if the jobs market deteriorated faster than forecast or inflationary pressures eased more quickly than expected.

The most recent job figures showed unemployment steady at 4.1 per cent, although just 15,000 jobs were created in October.

Governor of the Reserve Bank of Australia, Michele Bullock, addresses media. Credit: Louie Douvis

The bank expects unemployment to rise to 4.5 per cent by the end of next year, but the minutes noted some unnamed members of the board had already heard of businesses letting staff go or deciding against filling vacancies.

“Such trends were not yet widely apparent from the RBA’s liaison with firms, but members observed that if forward-looking indicators began to suggest a widespread easing in prospective labour market conditions and a more rapid easing in inflation, the board might need to consider a policy response,” the minutes showed.

Another issue canvassed by the bank was that inflation might fall faster than expected.

While the quarterly measure of inflation shows prices up by 2.8 per cent over the past 12 months, the more volatile monthly measure of inflation has fallen to 2.1 per cent.

The minutes show the federal government’s energy subsidies may bring down inflation quicker than anticipated.

“There were also scenarios in which inflation declined materially more quickly than currently forecast, perhaps in response to emerging signs that rental housing markets in many cities were moving into better balance or because the energy rebates have a more pervasive effect than factored in,” they showed.

“Members noted that this could warrant an easing in the cash rate target, but that they would need to observe more than one good quarterly inflation outcome to be confident that such a decline in inflation was sustainable.”

The bank holds its last meeting of the year in mid-December.

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