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Insolvencies to decline, but new risks looming: report

Insolvencies to decline, but new risks looming: report article image

Insolvencies will decline by about four per cent in advanced markets this year, underpinned by broad-based economic growth and still-low interest rates, a new report predicts.

But the report by Atradius Economic Research warns that a turning point is looming with increasing risks to the economic global outlook. 

Trade policy uncertainty and monetary tightening is likely put the brakes on the downward trend in insolvencies, according to Atradius. 

“The short-term outlook is optimistic, especially given the strong performance of the United States in the first half of the year,” said Mark Hoppe, managing director, Australia and New Zealand, Atradius.

“But global growth is losing momentum so businesses should take a more cautious outlook for 2019. 

“Insolvencies will continue to drop but only by 1.2 per cent, he said. 

“Furthermore, companies around the world are facing higher financing costs and changing consumer preferences. It’s expected that the level of global business failures in 2019 will be on par with 2007, which marked the start of the Global Financial Crisis (GFC), so businesses need to stay vigilant.”

The Australian Securities and Investment Commission (ASIC) quarterly insolvency statistics for March 2018 show a 5.6 per cent increase in companies entering external administration compared with the same quarter last year.

Insolvency statistics are even greater than external administration statistics because companies can be under more than one form of insolvency appointment at any one time and can progress from one type to another.

Economic strength in Eurozone 

Atradius’s research indicates that Australia can expect a four per cent decrease in insolvencies in 2019, which is on par with Denmark, France, Ireland, Portugal, and Sweden.

For now, the global economy remains healthy with global GDP growth hitting 3.1 per cent this year, which is the fastest expansion since 2011.

The strong performance is being driven by economic strength in the Eurozone, although recently-strong momentum is expected to slow by 2019. 

Insolvencies in the Eurozone are expected to fall five per cent this year and only 1.8 per cent in 2019 due to the threat of protectionism, a hard Brexit, and political uncertainty in Italy. 

Portugal and France are outliers with a still-strong, although weakened, insolvency decline of five per cent expected in 2019 in both countries.

Portugal is enjoying strong growth and insolvencies are likely to decline by a healthy 15 per cent this year. France’s unemployment is decreasing and interest rates are at low levels. France is therefore likely to see a seven per cent decline in insolvencies this year. 

UK seeing increased insolvencies

Finland and Luxembourg are exceptions to the generally-positive eurozone outlook and insolvencies are expected to increase in Finland by 12 per cent, and in Luxembourg by 17 per cent. While economic growth across most of Western Europe remains strong, country specific developments in Denmark, Norway, and Sweden are trending toward increasing insolvencies. 

The UK is seeing increased insolvencies already, which is projected to increase six per cent this year and a further three per cent in 2019.

The US is seeing business confidence increase with insolvencies forecast to decrease by eight per cent this year. However, in 2019, GDP growth is expected to ease to 2.2 per cent. A strengthening US dollar and potential trade barriers are straining exporters.

Retailers are seeing increasing bankruptcies due to the shift away from mall shopping and this pattern is likely to persist in the coming years. Rising interest rates are making financing more expensive. 

Therefore, a sharp deceleration to a two-per cent decline in bankruptcies is forecast for 2019.

“Australian businesses should capitalise on the short-term optimism in the global market while realising that the current favourable conditions are likely to change, potentially putting some ventures at risk,” Mr Hoppe said.

“Businesses should prepare for this with strong fundamentals to protect cash flow. Additionally, businesses should implement trade credit insurance to smooth out the potential troughs that could be created by worsening insolvency rates.”

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