Australian insolvency rates predicted to increase in 2025

Recent findings from illion's Commercial Risk Barometer indicate that Australian businesses may see a rise in insolvencies in 2025 due to renewed financial pressures.

Analysis from illion's commercial bureau, covering 2.5 million active businesses, showed that failure risk increased in the fourth quarter of 2024, reversing the recovery observed earlier in the year. Business failure risk is now 6% higher compared to earlier periods, edging towards the peak seen in late 2023.

The data reveals an increase in the number of businesses at very high risk of failure, up by 1.3% in the fourth quarter of 2024, nearly doubling the net growth rate of new businesses at 0.7%. More notably, businesses classified under severe risk of failure rose by 3.7%, suggesting a potential rise in insolvency rates between 2% and 3% if the current trend continues.

Barrett Hasseldine, Head of Modelling at illion, explained that visible stability might mask underlying issues in the business environment. He stated, "At first glance, it may seem like business conditions are improving—but look a little closer, and you'll see cracks appearing beneath the surface. Failure risk is quietly rising, and we're seeing businesses that once seemed resilient now starting to struggle. It's like walking on thin ice: some companies will make it across, but others are going to fall through."

Traditionally low-risk industries are no longer immune to these financial pressures. While high-risk sectors such as food services, retail, and construction showed stability in the last quarter, low-risk sectors like financial services, insurance, utilities, and education are facing increased challenges.

Specifically, the financial services sector saw its failure risk increase by 2.3%, three times the national average, accompanied by the largest quarterly deterioration in overdue invoices, surpassing figures in food, construction, and retail.

In the education sector, failure risk increased by 1.6% due to tightened household budgets and lower immigration levels affecting tertiary and skills training institutions.

Utilities businesses witnessed a 2.4% rise in failure risk, driven by fluctuations in energy prices and heightened consumer price sensitivity.

Mature businesses within these sectors are also experiencing difficulties, with failure risk rising by 4% for education, 9% for utilities, and 2.6% for financial services firms during the last quarter.

Hasseldine commented on this unexpected shift: "We're seeing an unexpected shift in the business landscape. Some industries are bouncing back, while others are just starting to feel the squeeze. It's a mixed bag—construction is finding its feet, but finance, education, and utilities are slipping. The message for business leaders is clear: now is not the time to assume smooth sailing."

While challenges exist, not all industries are in decline. The construction sector experienced a decrease in failure risk by 1.1% due to increased demand for renovations and new building projects. Additionally, the mining and telecommunications sectors have demonstrated resilience, with financial stress levels dropping by 3.6% and 3%, respectively.

Hasseldine emphasised that despite the improvements in some sectors, the uneven nature of the economic recovery necessitates caution. He advised businesses to monitor their trading partners closely as a precautionary measure.