Restaurants on the brink as business failures plateau
The future of many businesses struggling to stay afloat rests upon the Reserve Bank and Donald Trump.
Business conditions in Australia remain perilously difficult, with insolvency levels at record highs in April, CreditorWatch reported in its monthly Business Risk Index on Thursday.
But there are signs the economy is turning a corner.
With inflation back in the RBA's target band, interest rates are on the way down too.
The number of companies hitting the wall has plateaued to about 1250 a month and there are encouraging signs business conditions could improve as rate cuts in February and May filter through the system.
The economy is at an interesting crossroads, says CreditorWatch chief economist Ivan Colhoun.
"We hear so much about the cost-of-living crisis, but it's a 'cost-of-doing-business crisis' as well, with businesses having seen significant increases in their cost bases," Mr Colhoun said.
"Hopefully the recent interest rate cuts by the RBA can build on the beneficial effects of last year's income tax cuts and cost-of living support."
Operators have been hit by a dual challenge in recent years of input costs rising at the same time as consumer spending weakened.
Hospitality businesses have been worst affected, given their reliance on discretionary spending, CreditorWatch CEO Patrick Coghlan says.
"When households feel the pinch from interest rate rises and price increases, they typically spend less at places like cafes, restaurants, bars and pubs," he said.
"The increase in people working from home has also had an impact, mainly in outlets in CBD areas."
One in 10 hospitality businesses closed over the past year, while the sector also ranked highest for late payments and tax defaults over $100,000.
The next worst industry for insolvencies - administrative and support services - had a substantially lower closure rate of 6.5 per cent.
Tax cuts, real wages growth and government cost-of-living supports like energy rebates boosted a gradual consumer recovery at the start of the year.
But consumer confidence has stagnated since Donald Trump's 'liberation day' tariff announcements shocked investors and sent markets into a spin.
Global trade disruptions prompted the Reserve Bank to downgrade Australia's growth prospects in its quarterly update of economic forecasts.
The central bank noted household consumption had been lower than expected as it cut the cash rate by 25 basis points on Tuesday, with recent flooding likely to blame.
With lower consumer spending, profit margins are being stretched and businesses are finding it harder to pass on costs, RBA governor Michele Bullock said.
"In a context of very strong demand, which arguably we saw coming out of COVID when everyone was out there trying to spend, then businesses have the ability, I think, to pass on costs," she told reporters on Tuesday.
While challenging for business owners, it means there is less chance of inflation reigniting.
Lower interest rates should have beneficial effects in the second half of the year, especially if market expectations of two or three more cuts are correct, said Mr Colhoun.
But a combination of slower population growth, the effects of continued high costs and the uncertain impacts of Mr Trump's tariffs threaten to make conditions worse.
"Taken together, we expect an elevated level of insolvencies to remain over the next six months," Mr Colhoun said.
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