Hello and welcome to our May 2023 business risk index results I’m Michael Pollack, Head of Content at CreditorWatch and I’m joined today by Chief Economist Anneke Thompson. Hello Anneke, great to see you again.

Anneke

Hi Michael.

Michael

Okay so let’s kick off our discussion of the results. Obviously we’re seeing a deterioration in our key indicators across the board. Could you take us through that please?

Anneke

Yeah, I guess the standouts for me the continuing increase in credit inquiries. That metric is on a clear increasing trend and we’ve got two and a half times the number of credit inquiries this month as the same month last year. So that tells us that businesses are accepting a lot more credit applications which, on in one hand, is concerning but also they might be making more credit inquiries and more frequent credit inquiries on some of their customers if you know they’re a little bit unsure as to their financial viability. So usually when we see that indicator rise in a market it indicates that that a lot more customers are doing their due diligence.

Michael

Okay, and looking on the industry side, ee’re obviously seeing pressure coming to bear on the hospitality industry, food and beverage services. As you know, interest rates bite and people tighten their belts, discretionary spending is reduced. What else are we seeing there on the industry side of things?

Anneke

Yeah, the food and beverage sector has always been the top of our list for probability of default by industry, but they’re actually experiencing quite good conditions in the first sort of quarter or first half of this year, even with lots of people still eating out, and turnover in the food and beverage sector is still quite good and still positive. It was only last month actually where that that indicator, in terms of retail trade data, turned negative. So that’s really concerning. It’s getting worse and going to get much worse as it progresses. The other area of concern for us now is the retail trade sector. So again, they saw boom conditions after lockdowns ended, particularly new South Wales and Victoria, and that’s well and truly over. And now the savings rate and the discretionary spend that a lot of households have has been wiped out through interest rate rises and rental increases as well.

Michael

And obviously the construction industry continues to see external administrations go up.

Anneke

Yeah, we haven’t had and a big-name construction firm becoming insolvent over the last month or so but there’s still a number of smaller subcontractors that don’t necessarily make the papers are going into insolvency day-in day-out. That is one of the industries that that is a big concern, and they’ve got a similar trend to the food and beverage sector, where they’ve been very, very busy. We’re getting to the end of the cycle now where the massive number of houses that started being built and the massive number of renovations that started happening over COVID are now reaching their conclusion. And because of the cost of building a house and doing a renovations, their workload or their forward work orders will be severely constrained. So that’s adding further pressure on the construction industry.

Michael

Project times are blowing out too I believe so it’s taking that much longer for builders to complete projects.

Anneke

Yeah, absolutely and, you know, time is money and we know the cost of labour is going up, so the longer it takes the more labour costs that they have. They have to wear that they probably didn’t budget for at the start of the project. And the cost of construction supplies is still increasing – I think that fact often gets lost. The end of 2019, before COVID, was significantly different. So we’ve still got contracts that were entered into in 2020 that are still being worked through at far different supply input costs.

Michael

Yeah, sure tough times. Looking at our geographic insights, we ran an analysis of our biggest moving regions up and down the index over the last 12 months. That spat out some interesting data in terms of regions that are under stress at the moment. What we identified was that three of the worst five movers down the index were actually all adjoining on the central coast of new south wales. That was Wyong, Gosford and Lower Hunter. Gosford and Wyong, in particular, have had a drop in property prices but an increase in listings indicating mortgage stress in those areas. What else are we seeing going in those areas, Anneke?

Anneke

Yeah, it’s an interesting phenomenon because unemployment’s really low and there’s still a high number of jobs available in those areas – they tend to be at the lower paid end of the job spectrum. So, the biggest employers in those areas are health and community assistance, retail trade and construction. And while there are lots of jobs available in those areas, the rate of pay or the pay increase you can get is just not keeping up with mortgage increases and also rent increases as well. So, that’s probably where the stress is coming from. This is the awful thing about inflation and while the RBA is so keen on getting it out of our economy through the pain of interest rate rises, it’s the lower paid people that bear brunt of it. They just can’t get the wage increases to keep up with the cost increases whereas people who work in professional services or things like that can often take on a bit more work and the work that they take on is highly paid.

Michael

Falling property prices have really had an impact on people in those particular areas, unfortunately. Casey, in Victoria, has also seen this play out.

Anneke

Yeah, well Casey is an area with a lot of residential housing subdivisions. So a lot of people in those areas would be very early into their into their home loan journey, maybe on a fixed rate, that started two years ago that were on very low interest rate. Coming off that, they’ll notice an enormous jump in their home loan repayments, but not the equivalent increase in their in their income. So, that’s where the stress comes from.

Michael

Thanks for that Anneke. Always very interesting to go through the numbers with you. If you would like more data from our Business Risk Index which includes our interactive map that covers more than 350 regions around Australia, you can find that at creditorwatch.com.au/businessriskindex. Thank you again, Anneke, and we will see you next time.

Anneke

Thanks Michael.