The real world is made up of some significant dramas that don’t announce themselves in advance to a majority of people. As the old maxim goes: “No one rings the bell” for all to hear when a stock market is about to crash. Similarly, a significant slowdown or even a recession can surprise a lot of economic experts and important government policy setters, such as Treasurers and even the Governor of the Reserve Bank.

Economies have many moving parts, with some growing while others are contracting. Sometimes the growers can attract more attention than the contractors. This is what I was thinking when my 2GB colleagues asked me to explain this short story in the Daily Telegraph.

It went like this: “Business failures are at the highest level since the Global Financial Crisis as deteriorating economic conditions coupled with poor consumer spending and interest rate pressures damage the fortunes of many companies.

“And insolvency experts predict that company failures are set to keep climbing for the next 18 months, despite a rising population and gross domestic product growth.

"Figures from the Australian Securities & Investments Commission show there have been 8,742 insolvency appointments up to April 30 in this financial year."

So, why could this be happening? Well, as someone in business that has an office in Sydney’s CBD, which operates Switzer Financial Planning and our publishing business that puts out Harper’s Bazaar and Esquire magazines, along with the online publications of Men’s Health and Women’s Health, I’ve got a reasonable take on what’s going on in the real world.

Try these challenges that many businesses are dealing with:

1. 13 interest rate rises.
2. These rate rises not only have added to business costs but take away consumers who were caught in a debt trap.
3. The pandemic taught many consumers to buy online, which helps big businesses more than smaller operators.
4. The Tax Office is cracking down on businesses that have had debts created by the lockdowns of 2020 and 2021.
5. More workers now do it from home so any business in CBDs that need five days of good trade to cover rents, pay wages and make profits, are being squeezed.
6. Petrol and power bills have spiked massively and that hits both business costs and customer demand.
7. Governments are now trying to save the planet, and this adds to the cost of living.
8. Landlords are chasing back rents not paid during the lockdowns.
9. Big businesses not facing real competition have been price gouging, not only consumers but also smaller businesses.

I could go on, but you get the picture. It paints something that’s more negative than positive for businesses.
In reality, you can see the insolvencies are the fallout of the mortgage cliff, where consumers and businesses benefitted from low fixed interest rates created in the pandemic but now “it’s time to pay the tillerman”. For some businessowners the tillerman is ‘floating you’ to the death of their small operations.

The signs of these worrying developments for the life of businesses showed early this year. In January. Shelley Dempsey of the Australian Institute of Company Directors (AICD) wrote: “With economic pressure intensifying due to higher interest rates and other causes, Australian insolvencies are on the rise again, highlighting a lag in the impact of the COVID-19 pandemic on small business, according to ASIC’s latest corporate insolvency statistics, published in December.”

She explained that “…for the period 1 July 2022 to 30 June 2023, SMEs dominated corporate insolvencies, with 83 per cent owning assets of $100,000 or less, 82 per cent employing fewer than 20 staff, and 68 per cent owing liabilities of less than $1 million.”

The construction industry received the highest number of reports (28%), followed by the accommodation and food services industry (15%).

The most common reported causes of business failure were inadequate cash flow or high cash use (52%), trading losses (49%) and the pandemic (19%). Most reports were received for insolvencies in NSW (41%), followed by Victoria (27%) and Queensland (18%).

All this combined with falling retail sales, now rising unemployment, consumer confidence at levels not seen since the 1990s recession and weak business confidence, explains why the RBA is ‘on hold’ with interest rates and why the next move on rates will be down.

If it’s not, then insolvencies will surge, and a recession will be more likely.

AMP’s chief economist Shane Oliver agrees with me that the next move should be down. He explained why with the following: “The recent US and Australia inflation scare after hot March quarter inflation looks to be receding, Australian economic growth is very weak with the economy going backwards were it not for massive population growth, the labour market is cooling which will result in slower wages growth ahead and Australian mortgage holders have seen far bigger rate hikes in the actual mortgage rates they pay than their counterparts in most other comparable countries. We are allowing for a 0.25% cut in the cash rate to 4.1% in November or December and two cuts next year.”

I’m sure the RBA knows what Shane’s seeing and only rate cuts will slow down the escalation of businesses and households going bankrupt.