Is your favourite store next? Why businesses are going bust

Corporate bankruptcy filings began ticking up in Australia and beyond in 2023, reflecting shifting macroeconomic conditions as rising global inflation prompted central banks worldwide to respond by hiking interest rates.

The numbers for 2024 are even higher, with some well-known brands, particularly in more vulnerable sectors like construction, retail and travel, among the casualties.

In the construction sector, for example, major builders such as Porter Davis Homes, Probuild, and Dyldam have folded recently. In the retail sector, a range of companies have folded, including Godfreys, Marquee Retail Group, parent company of brands including Colette by Colette Hayman, and The Body Shop’s UK parent, which put the future of its 100 Australian stores in doubt.

Australian companies are facing a wave of insolvencies not seen in a decade, with filings over the past 12 months topping 10,000 for the first time since 2013. This surge reflects the harsh reality of high inflation and raises concerns about a prolonged economic strain.

The Australian Securities & Investments Commission (ASIC) data reveals a dramatic rise in company administrations. Filings reached 10,497 in the 2023-2024 financial year, a significant jump from 7942 the prior year. More alarmingly, these figures surpass the previous two years, when filings hovered below 5000 annually.

ASIC first warned of this trend in April, with filings for the first nine months of the financial year already exceeding the previous corresponding period by 36.2%. Monthly filings reached 1137 insolvencies in March 2024 – a record until May, when 1249 new cases were initiated.

Inflation and debt squeeze businesses
According to Associate Professor Evgenia Dechter in the School of Economics at UNSW Business School, the rise in insolvency numbers is an inevitable result of economic upheaval caused by overly hot inflation, which first became a global challenge in 2022.

“The present economic climate is characterised by low consumer confidence and low demand, which hurt business profitability,” says A/Prof. Dechter. “High materials costs and high interest rates, which have raised the costs associated with debt servicing, further contribute to the increase in insolvencies.”

Recent consumer price index (CPI) prints indicate high inflation is staying the course, exacerbating and threatening to entrench these challenges further. The most recent Australian Bureau of Statistics (ABS) data showed monthly core inflation totalling 4% in May. This is the highest level this year, reflecting that Australia has struggled to control rising prices compared with other developed economies.

A/Prof. Dechter observes that there has also been a surge in new business registrations since 2021, particularly by smaller firms with lower financial buffers. While the insolvency figures are still concerning, ASIC also noted that due to the boost in registrations, the ratio of companies entering administration to registered companies remains lower than in 2013.

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