Lockdowns strangling business turnover…for now

Ongoing lockdowns in the eastern states are having a devastating impact on business turnover as companies become more cautious and reduce expenditure. While state-based support packages are finding their way into COVID-affected businesses’ bank accounts, we need more direction and consistency from state and federal governments on the way out of the pandemic.

Before current lockdowns, there were encouraging signs business activity was recovering from the devastating effect the pandemic had across the economy during early and mid 2020. CreditorWatch data shows business trade had picked up considerably between September 2020 and March 2021, a trend that has now been reversed.

Our numbers show trading activity declined in July, with receivables down 30 per cent compared to July 2020. The concern is lacklustre trading activity, with both the number of invoices issued and value of invoices at multi-year lows, will have a ripple effect through Australia’s commercial sector. Trade turnover is correlated to insolvencies, so the weaker trading activity is, the higher the risk of insolvencies. Our Business Risk Review data will deliver more insights into this dynamic in early September.

Trade receivables are unlikely to turn the corner until there is more certainty around when lockdowns will end. This is despite the fact many businesses have substantial cash reserves they could be employing across their operations. Rather than put these funds to use, many firms are conserving cash because they don’t know how this stage of the pandemic will play out.

Numbers declining

Trade activity is, of course, only one in a series of data points that have demonstrated a significant deterioration over the last few months.

For instance, construction is experiencing increasingly challenging times, especially after the forced shutdown of the sector in NSW as a result of the most recent COVID outbreak. Our data for the first half of the year showed construction is particularly exposed to the high risk of defaults, despite the federal government’s HomeBuilder stimulus providing some support to the sector.
 
Construction has a multiplier effect through the economy. So how this industry performs in the second half of 2021 will have broad implications for Australia’s economic activity, overall business confidence and the strength of the post-lockdown economic recovery.

Other data is mixed, but positive numbers are likely to reflect a lag and trend downwards while NSW and Victoria are in lockdown. For instance, business investment was up by 4.4 per cent in the June quarter, a substantial improvement on the 2.6 per cent rise in business investment the market was expecting. Expect this number to retreat next month, if only in the short term.

By contrast, payrolls were down by two per cent for the two weeks to 31 July and are down 3.7 per cent over the past month. As might be expected, retail sales were down 2.7 per cent in July, after dropping by 1.8 per cent in June. Overall, on a quarterly basis, the market is expecting GDP growth of 0.7 per cent for the June quarter.

The way ahead

The path forward is by no means clear. We are still waiting for genuine clarification at the state and federal levels about milestones that need to be reached before the economy can open up, how any vaccination passports will work and when international borders may re-open. When businesses have more certainty about the operating environment, they will have more confidence to trade with each other. This is what’s required to kickstart any economic recovery.

There is a number of precedents we can be following overseas to guide our decisions. For instance, some nations have introduced traffic light systems to indicate whether a destination has high levels of COVID infections. Travellers visiting green destinations need to follow fewer COVID protocols than those travelling to amber or red destinations. We could introduce a similar system here, drawing on other nations’ insights into what works and what doesn’t as economies open up.

CreditorWatch has access to extensive proprietary data that gives us important insights into what’s happening in the economy as it happens. We have consistently seen much lower than average figures for defaults, court actions and insolvencies through the pandemic. These numbers are artificially low thanks to government stimulus.

The federal government has largely now handed responsibility for supporting businesses that have been affected by lockdown to the states, for instance with grants and, in NSW, the JobSaver subsidy. Even with these provisions, it remains to be seen how businesses will perform during this challenging period, especially those operating in the worst hit sectors such as tourism and accommodation.

We will report back next month with a comprehensive view of the impact lockdowns are having. While numbers are likely to be subdued in the short term, we remain confident the economy will start to normalise as restrictions ease.

 

Upcoming Events
26
Oct
21
Australian Banking Innovation Summit 2021
Sydney, NSW, Australia
See all upcoming events
map4
Subscribe to receive insights delivered straight to your inbox
Latest news, unbiased expert analysis and insights across banking and finance