As we head into the festive season, we've taken a moment to reflect on the year that was and capture our thoughts on what 2024 is likely to bring for Australian businesses and the insolvency sector.
One of the biggest economic factors has been the 425 basis points rise in interest rates since May 2022. Early signs of its impact are becoming evident for consumers and businesses, but it has not really played out yet. In 2024 we expect to see the real impact of the interest rate hikes.
Inflation remains stubbornly high suggesting consumers are still spending more than they should. However, we are mindful that high immigration may be offsetting any slowdown in spending, distorting the underlying economic conditions.
The number of insolvencies has returned to pre-Covid numbers and is slightly ticking up above historical averages.
We have seen a correction in the construction industry which has experienced significant increases in the cost of materials and supply chain issues. Funding has also been adversely impacted by cautious investors and lenders. While we expect this to continue during 2024, it seems the worst of it has likely passed for construction businesses.
What is in stall for 2024?
As we continue to see consumers experience cost-of-living pressures caused by a combination of higher loan repayments and higher goods and services costs, we expect businesses and individuals teetering on the edge of financial distress to be further squeezed. Bankruptcies are likely to increase and track above the historical long-term average.
Industries such as retail and hospitality sectors seem most likely to experience the greatest impact overall. For those industries, we could see a correction not too dissimilar to that experienced by the construction industry over the past 18 months.
The construction industry is likely to come out of its correction cycle, but it may be impacted by the persistent slow market around new builds, the ongoing completion of large infrastructure projects which has swallowed up large chunks of labour, the inflationary effects on the economy, low unemployment, and further interest rate rises. The low Australian dollar may see a pick-up of foreign buyers in the market and the impact of higher immigration may replace the drop in existing local buyers.
It's our view that further interest rate rises are ahead, albeit not at the same speed and size delivered by the RBA to date. We believe one to two more interest rate rises will occur before rates stabilise and then possibly start to decrease in the 2025 calendar year.
The insolvency and restructuring industry is undergoing its own moment with a "boots and all" review that is promising significant regulatory changes particularly around reducing the cost of insolvency.
What's our prediction:
In trying to predict what 2024 will bring we are of the view that the following is more than likely to occur:
- A continued focus on recovery through the available enforcement processes by government departments, particularly the Australian Taxation Office.
- An increase in enforcement by the non-banking sector caused by a tightening in the leverage to value ratios and borrowers struggling to find refinancing solutions. We expect this to continue and ramp up.
- Retail and hospitality sectors will be the hardest hit. They will see discretionary spend reduce and thus we expect distressed transactional activity more likely, resulting in an increase in insolvencies in 2024.
What can advisers do?
Focus on cash flow:
We expect to see a continued deterioration or tight cashflow for many businesses due to the impact of high interest rates and reduced discretionary spending. The importance of strong cashflow and working capital combined with disciplined forecasting will ensure that a business can tolerate any slowdown that might occur.
Help your clients with their businesses' financial performance:
Advisers should be pro-active and reach out to their clients to discuss financial performance, and strongly encourage their clients to maintain their statutory lodgements to avoid personal liability via the ATO director penalty regime. Businesses that are unaware of their cashflow requirements should ensure that they speak with their advisers around financial performance.
Cathro & Partners
At Cathro & Partners we have continued to grow and now have a national footprint across all major states and territories. Through our alliance with Auxilium Partners, we are able to service clients that operate in multiple cities or across the country. David Mutton and Henry Kazar recently joined us to open and run our offices in Victoria and ACT respectively. John Laird continues to service government clients. Declan Lane heads up and runs our Queensland office. Andrew and I have been running matters across the country.
The many assignments that we have undertaken in 2023 have ranged from a combination of enforcement roles for secured creditors through to safe harbour and restructuring assignments, helping clients and their advisers achieve successful solutions. Industries that we have advised on include manufacturing, mining, property, hospitality, technology and retail.
Our referrer network continues to support us, and we thank you.
Our key referrers have witnessed a continued fragility in certain clients caused by the uncertainty of the market, further interest rate rises and a general slowdown to achieve the Government's goal of inflation returning to 2 to 3 per cent per annum. We believe that this will take longer than expected and which means businesses need to plan for a continuance of difficult conditions in 2024.
Finally, from our national team of Principals - David, Henry, John, Andrew and myself - thank you for your continued support. We are forever grateful for our network. Wishing you a merry festive season and Christmas celebration. May 2024 bring joy and happiness to all.
