Australia is seeing striking rates of business insolvencies.

Debt monitoring firm CreditorWatch has reported a 22 per cent increase in businesses entering external administration over the past year. 

The surge in business failures highlights significant economic challenges, intensified by a combination of weak consumer demand, rising costs, and aggressive tax collection efforts.

South-west and western Sydney, along with south-east Queensland, are identified as high-risk areas facing the brunt of these economic pressures. 

In contrast, regional Victoria, north Queensland, and inner Adelaide are currently less affected. 

The construction industry, particularly smaller sub-contractors in the residential sector, is feeling the heat with the most tax defaults recorded amidst ongoing cost hikes for building materials and labour shortages.

Patrick Coghlan, CEO of CreditorWatch, has expressed concerns about the sustainability of businesses under these conditions. 

“Most businesses, particularly those that are consumer facing, and therefore exposed to the vagaries of discretionary spending, are being hit by a range of heavy impacts,” he said.

Coghlan predicts no significant improvement in business conditions until there is a revival in consumer spending, which itself hinges on potential interest rate cuts - a scenario not foreseen in the immediate future due to persistently high inflation rates in the US.

The Australian economy is grappling with the effects of interest rate hikes over the past two years, markedly affecting mortgage rates and putting additional pressure on consumer spending. 

This economic strain is set against a backdrop of a robust US economy, which continues to perform well across key indicators like inflation, employment, and consumer spending.

Economists have warned of worsening conditions, highlighting the rise in trade payment defaults as businesses struggle to meet supplier payments on time. 

“Of particular concern is the continued high level of trade payment defaults which, coupled with the ATO now lodging defaults for tax debts outstanding of $100,000 or more at increasing rates, means more and more businesses are unable to meet their supplier payments on time,” CreditorWatch chief economist Anneke Thompson cautioned. 

The expectation is that these defaults may continue to rise as long as interest rates remain elevated.