Australia's economy is facing further challenges as business bankruptcies reach a 25-year high. In March 2024, a total of 1,131 businesses went bust, marking the largest number since ASIC began collecting these statistics in 1999. This surge in bankruptcies highlights a two-speed economy, with companies struggling due to intense labor and input costs and a lack of pricing power. The global number of rated corporate defaults in 2024 is also the highest since the global financial crisis in 2009 [9aa556e5].
The number of companies entering external administration in Australia has hit a ten-year record high, with 7,742 companies entering external administration from July 2023 to March 2024, a 36% increase compared to the previous nine-month period. The construction and accommodation and food services industries accounted for the highest number of company failures. The Australian Securities and Investments Commission (ASIC) expects the number of companies entering external administration in June to exceed 10,000, the highest level since 2013. The pandemic's true impacts are starting to emerge as government support wanes and finance partners take a stricter approach. Business owners and boards should not panic but should take sensible precautions. It is important for companies to identify critical points of failure, support early intervention, and seek advice even if they are not currently worried. Taking these precautions can help businesses navigate the challenging market conditions and increase their chances of survival and success in the future [e690afdb].
The Reserve Bank of Australia is grappling with the difficulty of reducing interest rates as core inflation is driven by intense cost pressures in the services sector. In contrast, New Zealand's central bank has already started raising interest rates due to increasing services inflation. The US Federal Reserve is expected to make cuts later this year in response to reaccelerating core services inflation. The US economy has failed to normalize due to low unemployment, strong wage growth, and stimulatory fiscal policy. The recent realization that the inflation cycle is not over has led to an increase in US government bond yields and a decline in US equities prices [9aa556e5].
The business bankruptcies in Australia are concentrated in several sectors, including commercial real estate, residential property development, construction, retail, and hospitality. These sectors have been hit hard by the economic challenges, and investors are cautioned against investing in risky debt securities with historically tight credit spreads [9aa556e5] [73479cab].
The rise in mortgage rates is another concern for Australia's economy. Mortgage rates in the country have surpassed those in the United States, putting additional pressure on the economy. Over the past two years, rate hikes have contributed to increased business failures. The food and beverage industries have been particularly affected, with a record-high number of closures. Additionally, construction firms are facing challenges such as tax defaults, rising building material costs, and labor shortages. Business-to-business payment defaults have also surged, indicating financial difficulties across sectors. The mining industry, a significant contributor to Australia's economy, is also showing signs of strain. The worst-affected areas are Western Sydney and South-East Queensland. However, older businesses and residents have displayed greater resilience in the face of these challenges. The Australian dollar is under pressure and may consider cutting rates before the United States [73479cab].
In the United States, corporate bankruptcies are also on the rise. April 2024 saw the highest number of corporate bankruptcies in a year, with 66 filings, an 88% increase from January's 35 filings. The increase in bankruptcies is attributed to eroding bets of an interest rate cut by the Federal Reserve. Rising costs slowed when a rate cut looked likely in early 2024, but last month's stubborn inflation and slowing GDP made a Fed cut look unlikely. The three sectors leading in bankruptcies were consumer discretionary, healthcare, and industrials. Fed officials continue to signal that lower inflation prints are still necessary before an interest rate cut can occur. Analysts warn that the longer monetary policy remains unchanged, the greater the risk of something bad happening in the economy [490dcfa2] [cca122dd].
Danielle DiMartino Booth, CEO of QI Research, warns that the U.S. economy is on the brink of a corporate bankruptcy wave, which could result in a significant increase in job losses. Nine companies valued at $50 million or more have already filed for bankruptcy this year, and Booth predicts that the number of large bankruptcies will reach 25 by the end of June. She believes that the bankruptcy cycle will help tame inflation. The economy has lost 1.5 million full-time jobs in the past six months and replaced them with only 962,000 part-time positions. Small businesses, which account for 40% of American jobs, are facing increasing uncertainty and financing challenges. The impending wave of corporate bankruptcies could threaten the recent boom in the U.S. labor market, which added 272,000 nonfarm payrolls in May despite the unemployment rate rising to 4% [875def99] [27d73484].