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.
