Insolvencies flat in October, but experts warn it’s just the calm before the post-Christmas storm

The number of corporate collapses grew by only 1% during October, but experts warn the result may just be a temporary period of calm before a weak Christmas that could push more SMEs into administration.

Figures released by the Australian Securities and Exchange Commission show the total number of company collapses grew from 766 in September to 774 in October, representing an increase of just over 1%.

Insolvencies either decreased or remained flat in most states, the figures show. But experts point out that Queensland recorded an increase in collapses from 155 to 187, most likely due to the struggling tourism sector, and warn that a weak retail period over Christmas could prompt more collapses.

Downey & Co. principal Jim Downey says he expected the numbers to rise much higher than 1%, given the amount of industry activity he’s observing.

“Anecdotally there seems to be a lot more activity right now. But of course, raw numbers don’t necessarily mean anything because the size of each job isn’t revealed.”

“There seems to be a spike of activity in the early months of the year. There is usually some type of quarterly spike then. Of course the December BAS is not due until February, so things generally quieten down in January… but we could see numbers possibly rise during February.”

The figures show insolvencies decreased in New South Wales, Victoria and Tasmania, and remained flat in West Australia and the Northern Territory. Insolvencies increased from six to seven in the ACT, and from 19 to 22 in South Australia.

But the weakest state by far was Queensland, which recorded a substantial increase from 155 to 187 insolvencies during October. Downey point out the tourism industry is still suffering and the high Australian dollar is putting pressure on many businesses in the north.

“This may very well be due to the exchange rate being so high and that is having a huge effect on tourism and tourism-related businesses,” he says. “I think it’s well shown by the fact other states have gone down in numbers.”

Taylor Woodings also points out in its monthly analysis that the Queensland-based Fraser Island Company went into administration during October, perhaps representing the sentiment of the state. The company also points out that voluntary administrations in October surged by 32%, and that the figures are the second highest for an October over the past seven years.

Taylor Woodings partner Quentin Olde says the number of insolvencies appearing in January and February really depends on how Christmas trading performs.

“The concern we have going into the Christmas period is that retailers are still under pressure, and that’s going to have some flow-on effects into the national economy, and other sectors such as property, etc.”

“This trading environment is a very important one, and I think we’re going to see some signs of trouble in the months ahead.”

Taylor Woodings also says in its analysis that the economy is clearly under pressure, and will be until there are signs of decreasing insolvency figures.

“Increased unemployment, worsening business conditions and slow retail sales suggest the Australian economy is under pressure, succumbing to prevailing global economic conditions.”

“With leading economic indicators trending downwards, the Christmas period will be a critical indicator of consumers’ ability to spend and the broader health of the economy. If the Christmas trading period is weak, pressure will be placed on an already depressed retail sector.”

But Downey also says the situation may be worse than the figures suggest.

“The figures don’t always tell the full story because they don’t show the size of each collapse. So it could more serious than it appears.”