Australia’s most powerful central banker has suggested corporate insolvencies are at their highest point for a decade during a crisis in progress because many businesses were unable to cope with interest rates rising from record lows.
The annual tally of corporate collapses is now on track to surpass the 10,000 mark this financial year for the first time since 2012-13.
Construction firms account for a quarter of insolvencies during a population boom led by immigration and the next federal budget is setting aside $90.6 million for construction training in a bid to ease the skills shortage crippling the sector.
Reserve Bank of Australia Governor Michele Bullock has weighed in on this to imply that many of these companies would not be able to cope with a rise in interest rates from a record low of 0.1 per cent.
“Coming out of that with interest rates going up, yeah, I think some of those companies maybe stayed in business because they just had really low interest rates and they shored up their balance sheets,” he told reporters in Sydney on Tuesday.
Reserve Bank Governor Michele Bullock has suggested that corporate insolvencies are at their highest point in a decade because many companies were unable to cope with interest rates rising from record lows.
The annual tally of corporate collapses is now on track to surpass the 10,000 mark this financial year for the first time since 2012-13 (pictured, a Kingdom Constructions site in Melbourne).
‘Due to Covid-like subsidies, they will find it harder and I think we are starting to see that.
“We’re now seeing bankruptcies return to roughly the level they were historically as a proportion of businesses.”
Bullock also noted that the Australian Taxation Office was now pursuing debts that had not been paid during the 2020 and 2021 Covid lockdowns.
“The other factor here is taxes: I am not a tax expert, but I know that the tax office also seeks repayment of debts to the tax office,” he said.
Housing crisis
With builders accounting for more than a quarter of insolvencies, federal Housing Minister Julie Collins on Wednesday announced a $90.6 million package in the next Budget that will fund construction skills training.
The package will include $88.8 million for 20,000 additional free TAFE training places and $1.8 million to fast-track applications for potential migrants with construction skills.
“Our Government knows that building more homes is the best way to address Australia’s housing challenges, which is why we have an ambitious national target to build 1.2 million homes,” Ms Collins said.
Labour’s plan, to build 1.2 million new homes in five years, would require the construction of 240,000 a year from July 2024.
But ILast year, just 168,690 new homes were built, despite a record 548,800 net new immigrants moving to Australia in the year to September.
At 2.5 people per household, on average, that conservatively leaves a shortfall of more than 127,000 new households to cater for new permanent and long-term arrivals abroad before births are taken into account.
With unemployment at just 3.8 percent, builders are struggling to find enough skilled labor, causing costs for both wages and construction materials to rise.
“Companies don’t want to fire people yet because they’re worried that if they fire them they’ll be caught out like they were 18 months ago,” Ms Bullock said.
“They laid people off and had to rehire them and couldn’t, so there’s an element of labor hoarding.”
Bullock said high immigration had added to pressure on the property market, with rental vacancy rates in the capital now below one per cent.
‘As for the impact on inflation, it is actually not that simple because, yes, new immigrants increase demand; They have certainly increased pressure on the housing market, we know that,” he said.
‘But, on the other hand, they have increased the labor supply.
“Overall, it hasn’t increased inflation dramatically, with the exception that it has put a lot of pressure on the housing market and that’s obviously spilling over into rents.”
With builders accounting for more than a quarter of insolvencies, federal Housing Minister Julie Collins on Wednesday announced a $90.6 million package in the next Budget that will fund construction skills training.
Construction companies accounted for 27.7 percent of insolvencies between July 2023 and March 2024 (pictured, a Rork Projects building)
Insolvency crisis
Between July 2023 and March 2024, 7,742 companies became insolvent, and the Australian Securities and Investments Commission predicted 10,000 would likely fail in 2023-24 for the first time since 2012-13.
During that nine month period2,142 construction companies entered bankruptcy, representing 27.7 percent of all companies that declared insolvency..
Food and accommodation accounted for 1,174 of the bad debts, or 15.2 percent in total.
Insolvencies in the first nine months of 2023-24 were 36.2 per cent higher than in the corresponding months of 2022-23.
This came after the Reserve Bank raised interest rates 13 times in 18 months, between May 2022 and November 2023, taking the cash rate to a 12-year high of 4.35 per cent.
Borrowers have faced the most aggressive pace of monetary policy tightening since 1989, but Bullock hinted that rates could still rise again.
‘If necessary, we will do it. “If we really think that inflation is going to be persistent and significantly higher than our forecasts, we will adjust it again,” he said.
“We have always felt that it was too early to declare victory and I think the numbers of the last few weeks have shown us that.”
