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Corporate insolvencies on the rise: How will it impact Australia?

Corporate insolvencies on the rise: How will it impact Australia? article image

International governments are acting to avoid a bleak global growth picture.

Monetary tightening, the on-going trade conflict between the US and China, and policy uncertainty is causing volatile global economic conditions.

Global economic growth is likely to continue losing steam, so corporate insolvencies are expected to increase two per cent, predicts Atradius a global leader in risk management.

This marks the first annual increase since the global financial crisis.

According to Atradius, Australia is relatively insulated from these events, seeing insolvency rates stabilise at average rates relative to 2007 when the global financial crisis occurred.

In fact, the insolvency rates in Australia are predicted to drop slightly in 2019.

However, it’s important for Australian businesses to be aware of the risk posed by macroeconomic conditions in the rest of the world.

In its most recent Economic Outlook report, Atradius predicted a meagre one per cent reduction in insolvencies for Australia and New Zealand.

Insolvencies in APAC region 

Development in Asia-Pacific is expected to see a one per cent increase in insolvencies following a modest two per cent decrease in 2018.

Singapore is forecast to see the strongest increase (three per cent) as the region’s largest economy, Japan, is also facing a two per cent increase.

Australia’s outlook has deteriorated slightly but remains stable, says Atradius.

Subdued business and consumer confidence and decreasing lending have contributed to the worse outlook for Australia. The outlook is supported though by tax cuts to low and middle-income citizens and higher infrastructure spending.

Globally, the most prominent risk is still that of the trade war, proliferation and even though the US and China have declared a truce, this is far different from resolving the issue and the risk of escalation with Europe is still on the table.

A slowdown in Chinese GDP growth is the second-highest risk, while misguided policy from the US Federal Reserve System (the Fed) remains a significant risk despite improving its policymaking.

Fiscal stimulus may be on the cards

Many governments have seen the writing on the wall and their central banks have halted or even reversed monetary tightening. This still leaves the world with a very lax monetary stance and serious doubts about the design and effectiveness of any further monetary easing. This implies that fiscal stimulus may need to be considered, and this could become more urgent if the slowdown turns out to be more protracted than currently envisaged.

“The global economy is under a cloud and, while some governments are already acting to reverse the uncertainty with positive policymaking developments, it’s important for local businesses to be aware of the risk they face due to an expected increase in insolvencies in 2019,” said Mark Hoppe, managing director Oceania, Atradius.

“Businesses must be aware of the risk of non-payment by customers and act to protect themselves.

“This should include taking out trade credit insurance, halting supply to customers who pay late, and conducting due diligence to ensure they extend credit only to creditworthy customers.

“A reputable trade credit insurance provider can help businesses decide which potential customers to do business with versus those to avoid due to a high risk of payment defaults.

“Making smart decisions is essential to remain profitable in this uncertain economic climate.” 

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