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Business Risk Review: March 2021

Credit enquiries are at their highest level in 18 months

But, where’s the tipping point? That’s the question posed by the latest CreditorWatch Business Risk Review. An increase in credit enquiries indicates business conditions are normalising as companies begin trading at pre-COVID levels. 

Other data, including higher than expected economic growth of 3.1 per cent in the December quarter and a falling unemployment rate, also indicate Australia’s post-COVID economic recovery is both sustainable and in full swing.

Nevertheless, the end of government measures such as JobKeeper that artificially supported the economy during the worst of the pandemic is yet to take effect across the broader business sector.

The stats that matter – March 2021 compared to February 2021

  • Credit enquiries: 45% increase MoM
  • Court actions: 3% decrease MoM
  • External administrations: 13.6% increase MoM
  • Payment defaults: 9.5% increase MoM

Positive signs ahead

According to the March CreditorWatch Business Risk Review, growth in credit enquiries has been accelerating over the last six months whilst debtor court cases have bottomed out over the same period.

“While the number of external administrations rose in early 2021, on an annual basis these have now fallen over thirteen consecutive months. The average number of external administrations over the last six months is fourteen per cent lower than for the six-month period to September 2020,” said Mr Patrick Coghlan, CEO, CreditorWatch.

“This is a metric to watch given the economic forecast for 2021. We expect to see a rise in the number of administrations, especially with JobKeeper having come to an end,” he adds.

Industry deep dive into defaults

CreditorWatch recently crunched the numbers around the likelihood of defaults among different industries. Defaults suggest a business is in financial stress and complement trends in administration figures.

“Construction is one industry worth calling out when it comes to the upcoming propensity for default,” said Mr Harley Dale, Chief Economist, CreditorWatch.

“The number of administrations in this sector fell from 24 per cent of all insolvencies in the December 2020 quarter to 15 per cent of all insolvencies in January 2021, with a probability of default of 4.49 per cent,” he said.

This indicates payment conditions in the construction sector have improved, with the industry still being supported by the $25,000 homeowner grants.

Across the board, there is a low probability of default, with businesses in the healthcare and social assistance, arts and recreation services and agriculture, forestry and fishing sectors among the least likely to default.

Transport, postal and warehousing, public admin and safety and professional scientific and technical services are among the industries that are most likely to default.

Best and worst performing sectors for payment times

Look at the full year-on-year comparison of payment times by industry in the graph below – click to expand.

Sectors where payment times are improving include:
● Manufacturing (-15% when compared to March 2020)
● Electricity, gas, water and waste services (-28%)
● Retail (-23%)
● Accommodation and food services (-57%)

Sectors where rising payment times are a concern include:
● Healthcare and social administrative assistance (+140% when compared to March 2020)
● Administrative and support services (+49%)
● Construction (+29%)
● Professional, scientific and technical services (+25%)

Monthly economic perceptions with Harley Dale

“The number of credit enquiries looks extremely promising, but deferred payment times are deteriorating for some sectors, such as construction. The overall profile for external administrations has improved considerably but is unlikely to last. The CreditorWatch Risk Review for March 2021 highlights the prospect of uncertainty and variance in the business sector’s recovery in the post-JobKeeper world.

Total credit enquiries surged in March 2021, delivering a strong 25.3 per cent increase for the March quarter. On an annual basis, the number of credit enquiries increased over six consecutive months to March, and we expect credit enquiries to continue to improve overall but given the monthly spike in March don’t be surprised if there is a pull-back in April.

The overall profile for external administrations has improved considerably, although the latest BRR result comes with a sting in the tail. The number of external administrations has been substantially lower in the early months of 2021 compared to last year (down 43 per cent in March 2021 compared to a year earlier, for example.)

External administrations fell by 10 per cent in the March 2021 quarter, largely due to better results for Western Australia, Queensland and to a lesser extent, New South Wales. This better profile may well prove to be short-lived and masks an increase between both January and February and February and March. With the conclusion of JobKeeper, we are unlikely to avoid an increase in the June 2021 quarter.

We are in a similar boat for the number of court cases and defaults. The number of court cases has bottomed out after trending down through 2020 in a COVID constrained environment. The number of court cases was essentially flat in the March 2021 quarter (-0.3 per cent) and was 3.0 per cent lower in the month of March compared to a year earlier. Expect to see a rise in court cases in the approaching months.

There continues to be considerable variance in the number of days payments are overdue across different sectors of the Australian economy and this will continue to be the case. CreditorWatch analysis reveals clear improvement in March 2021 and for the March quarter for: Agriculture, Forestry and Fishing; Manufacturing; Electricity, Gas and Waste Services; Retail; and Accommodation and Food Services.

The sectors of Public Administration and Safety plus Education and Training appear to have turned the corner. Expect to see more positive results in the coming months.

Some key sectors that entered 2021 struggling are still crippled under the weight of a much greater than usual number of days that payments are overdue. Indeed, CreditorWatch analysis highlights a deteriorating situation for some sectors and the need to play a ‘long’ game for recovery may emerge through the rest of 2021. CreditorWatch analysis marks the following sectors as the prominent ones to keep an eye on: 

  • Healthcare and Social Assistance
  • Administrative and Support Services
  • Construction
  • Professional, Scientific, and Technical Services

There are other sectors looking a little shaky, but the dynamics should improve as the year progresses. Wholesale trade is an example of a sector that should display signs of improvement in the middle quarters of 2021 as the overall recovery in the Australian economy continues.” – Harley Dale, CreditorWatch Chief Economist

Data accurate as of April 1 2021. ASIC data subject to change

Read the media release