The reality is that the insolvency market in Newcastle and on the Central Coast are perhaps quieter than they have been in the last three years. This seems surprising considering the global economic situation and recent announcements of major company failures, such as ABC Learning. So this begs the question will Newcastle and the Central Coast remain insulated from the current economic environment?
- A Report recently issued by Macquarie Research Economics predicated a growth in insolvencies in the next twelve months of approximately 10% based on a decrease in demand (as measured by GDP per capita) of 1% to around 3%.
- The Federal Government has recently advised that they expect GDP growth to fall to approximately 2% over the next twelve months. However, actual growth for the September 2008 quarter was only 0.1%. September 2008 saw approximately 300 more companies placed into external administration than September 2007. In theory, this could lead to a 20% increase in insolvencies over the next twelve months.
- Recent Reserve Bank decisions to drop official interest rates (by 3% over 4 months), the fall in the Australian dollar as against the US dollar, and a decrease in world wide oil prices has cushioned the effect of the potential global ‘recession'.
- However, recent reports headed by a National Australia Bank survey suggest that current business confidence is at its lowest levels since the early 1990’s. The National Australia Bank survey predicates that GDP growth will only be 0.5% for 2009 and only 1.75% for 2010.
- All things considered, we still expect insolvencies to increase in the next twelve months at somewhere between 10 to 20%. This equates to an increase of 835 to 1,670 companies placed into external administration in the next twelve months. Nationally, between 9,180 and 10,016 companies are likely to fail in Australia in the next twelve months.
- Based on the above figures, approximately 4,591 to 5,008 companies in NSW are likely to be placed into some form of external administration in the next twelve months. With Newcastle and the Central Coast being the largest commercial areas in NSW outside of Sydney, it is inevitable that some of this fall out will be companies based in these areas.
- While both the Newcastle and Central Coast economies currently seem to be weathering the current global economic downturn, we have seen a significant increase in insolvencies in Sydney, (and most other capital cities). These have generally been large corporations, with exposure to international markets.
- In our opinion, we are yet to see the full effect of the current economic conditions on the small to medium enterprise market. We would expect to see an increase in insolvencies in this market in early to mid 2009, which in our opinion, will see insolvencies in Newcastle and on the Central Coast rise. This increase in insolvencies is likely to be lead by the retail sector where insolvencies, according to the Macquarie Research paper, are expected to increase by approximately 30% over the next twelve months.
So what can businesses do to prepare for tougher economic conditions? The following points are worth considering:
- Strict enforcement of credit policy;
- Effective and efficient collection of debtors;
- Investigate new customers thoroughly;
- Delay any discretionary spending;
- Thoroughly investigate any plans to expand. Capital rather than finance;
- Build cash resources; and
- Reduce debt;
All in all, 2009 is likely to be a very tough year for business and we are likely to see the levels of company failures and bankruptcies increase markedly. How the government, the market and consumers react to these failures, will to a large extent dictate how long the recession like economic conditions continue. It is, however, going to get harder before it gets any easier.