RBA rear-view mirror missing big current problems

RBA’s statistics are not providing a very accurate picture of current economic ongoings. Picture: Gary Ramage

The Reserve Bank is steering the economic bike by intently studying the rear-vision mirror. Sadly, the RBA’s mirror is not showing up that something very serious hit the Australian non-mining business sector two to three weeks ago.

Naturally, all the publicity is concentrated on the serious plight of homeowners with large mortgages whose desperation is intensifying along the lines accurately forecast (but widely criticised) by the CBA bank late last year.

A rapidly increasing group of employed people no longer have the cash to meet their commitments and have run down their savings, so are now cutting back on non-essential expenditure.

The Reserve Bank requires their suffering to force enterprises to stop increasing prices.

But what we didn’t expect was that in March 2023, wide areas of the business community would dramatically slow down or stop paying creditors.

Unless this vicious cycle is broken, the non-mining economy is in for serious trouble.

The latest CreditorWatch data showed a substantial slowing in the payment rate with smaller enterprises being targeted by the larger ones.

That data was collected only last month, but CreditorWatch chief executive Patrick Coghlan agrees with me that since then there has been a further big decline in the credit payment rate.

The decline is going to require banks, creditor insurance groups like QBE and governments understand the repercussions of their actions.

Even though it’s just the start of the cascade, the CreditorWatch data paints a grim picture of what is happening in the real world as distinct from that painted in official statistics that are way behind.

And, as I will describe below, there are pockets very strong consumer spending obscuring the overall trend.

CreditorWatch has found that small business is disproportionately feeling the brunt of late payments, with late payment rates on average three times greater compared to big business.

One in four big businesses are taking more than 120 days to pay small business customers with just three in ten paying within the first 30 days.

In turn, that means those enterprises stop paying their suppliers and the process multiplies. The previous governments’ attempts to speed the payments process failed.

Rising interest rates are increasing mortgage pain for households already under pressure from cost of living pressures. Businesses are facing a double hit – from consumers and other businesses under pressure.

The seriousness of the slowdown in the payment cycle is obscured by some buoyant areas, some of which I will set out below.

Apart from higher interest rates, the slump in payment rates is caused by a variety of factors.

One of the most important is supply chain blockages which mean that enterprises can’t complete orders and invoice payment.

Accordingly they prioritise payments to areas like telcos, power, banks and sometimes, the tax office.

The ATO’s past bad behaviour may impact revenue collections although that will be obscured by the enormous tax payments coming in from mining and to lesser extent, the parts of agriculture not impacted by floods.

Banks can play an important role in funding businesses caught in the supply chain trap.

The chief executives of our major banks all say they are on top of the problem, but collectively bank support is simply not happening to the extent required.

Clearly, one or two of the CEOs maybe obscuring their real policy, but I suspect in some banks, the real situation is not reaching the top.

If banks are not careful, there will be losses that could have been avoided with proper crisis management.

In normal times, the payment cycle is greatly helped by QBE and other insurers guaranteeing customers debts, but in recent times QBE has cut back in the construction area.

It’s an action that couldn’t be worse timed because the impact multiplies.

The government fast-payment stipulations slowed during Covid have disastrous consequences for 2023.

Many enterprises last year were experiencing very strong demand and this convinced them to increase stock ordering.

If their customers are higher renters or in the mortgage belt, demand is falling back.

Those with childcare payments in all levels of income are under pressure

Enterprises who are serving the affluent part of the community are still saying “what crisis”. Demands for big events and cruises are rising.

The obvious area areas of prosperity are at the top of the asset/income stream, although many high-earners mortgaged heavily in the boom and are petrified that one of their two incomes will be lost.

But surprising new prosperity pockets are being created.

As people reach an age where they can withdraw their super, that’s exactly what they are doing.

House mortgages are paid down and they are spending their money on pleasure so they can go on the government pension, which is about to go up by 7 per cent.

With home ownership becoming too hard and rentals through the roof, more children (and their partners) are living with parents.

And if the parents are on the pension, it creates a very efficient money management situation for all the parties because any rent is in cash and does not impact the pension.

Meanwhile, university and other education debts are indexed CPI so salary income has to reach $100,000 a year to enable payments to exceed the rise in debt.

For those wanting to save for a house and have children, it may be back to “Mum and Dad”.

If the parties can live together, they may stay.

The Reserve Bank squeeze is changing our world.