The growing gloom on financial and share markets may be hitting investors – including the super funds most of us have a stake in – in the hip pocket, but does it represent a threat to SMEs’ bottom lines?
Talk to the people with their finger on the pulse of Australia’s economy – insolvency and bankruptcy experts – and the answer appears to be yes.
Jim Downey, the principal of Melbourne insolvency firm JP Downey & Co, says there has been a significant increase in the number of businesses hitting the rocks over the last month.
“It’s very difficult to estimate the scale of it, but I’ve seen a noticeable upsurge in the law notices that appear in daily papers for insolvencies the last month – something is clearly going on,” he says.
Downey believes a combination of a tougher credit environment and the traditional Christmas cash flow crisis is driving a higher number of businesses to the wall.
“There appears to be a tightening up of credit, and that tends to have a bit of a domino affect as suppliers tighten up their credit terms and it gradually filters down through various sectors of the economy,” he says.
Bryan Collis, a partner in Sydney insolvency firm O’Brien Palmer, says he senses growing uncertainty across the consumer and business economies.
“There has certainly been an increase in personal insolvency and bankruptcy – it’s largely consumer driven, most of low income earners with too much debt, but on the corporate side there has certainly been an increase in the inquiry rate and people are reporting cashflow problems,” he says.
Collis says as things get tighter at the big end of town that can cause grief for smaller suppliers, especially those exposed to soaring raw materials costs or higher wages because of the skills shortage.
It appears that the longer the current high levels of financial and share market volatility last, the more likely they will hurt Australian businesses. One senior finance industry figure who declined to be named says that while banks and big corporate borrowers are feeling the squeeze now, businesses further down the food chain are yet to feel the full brunt of the credit crunch.
“It’s got the potential to feed down to lower levels of the market depending on how long the squeeze goes for. The smaller stuff is more generally more profitable, so banks won’t want to give it up if they don’t have to, but no one knows how long the slow burn will continue – and if banks keep having to tighten their books, eventually some of the smaller players will feel the pinch,” he says.
For the moment, however, it appears unlikely that dramatic falls on share markets over the past few days will have any lasting impact on the broader economy, according to Peter Brain, the director of economic think tank the National Institute of Economic and Industry Research.
“Any fall in the market would have to be sustained to have a lasting impact,” he says. “If it lost $100 billion there might be problems down the track, but at the moment it’s only one company getting into difficulty and they presumably will bounce back some time in the next days or weeks,” Brain says.
In fact, he says, future risks to the Australian economy are more likely to come from too much heat in the economy rather than too little.
“Too much debt, too much inflationary pressure and too high growth in the economy relative to resources available – some time over the next two or three years this overheating will produce a tipping point that will create a recession or period of much lower growth. The signs will be probably be mortgage interest rates around 10%, inflation at 3.5% and credit growth per household sector starting to slow significantly over the next few years,” Brain says.