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Trade Credit Risks rise as the economy slows

3 Minute Read
Written by Stephen Koukoulas
24 November 2024

The broadly based but moderate slowing in the Australian economy continues to impact the NCI Trade Credit Risk Index. The TCRI rose 1 per cent in the September quarter to reach its highest level in three years, which was during the early stages of the COVID pandemic. It has risen in six of the past seven quarters.

A rise in the TCRI signals a rise in credit insurance claims and is an indicator of economic conditions in the Australian economy. A rise in the index indicators downside risks to the economy.

While the TCRI is still below the general level that was evident before the onset of the pandemic in 2020, it has risen 54 per cent from the low point in the December quarter 2021, which was immediately prior to the start of the interest rate hiking cycle.

In the September quarter, the number of claims lodged rose by 37 per cent which is a leading indicator of greater trade credit risk in the near term.

Continuing the trend of the year, the largest number and highest values of claims has been in the ‘building and hardware’ sector. This reflects the pressures in construction which were driven by a sharp increase in costs and a slowing in demand. The on-going weakness in new construction activity, as evident in the near decade low level of new dwelling building approvals, is likely to keep pressures elevated in the building and hardware sector.

“While the TCRI is still below the general level that was evident before the onset of the pandemic in 2020, it has risen 54 per cent from the low point in the December quarter 2021…”

In a link to the building sector, the number of claims was elevated in the ‘electrical’ and ‘manufacturing’ sectors.

The number of claims remained relatively low in ‘finance’, ‘food and provisions’ and ‘furniture and floors’. This is despite weakness in consumer spending since the beginning of 2023.

Victoria accounted for 37 per cent of the claims in the September quarter, with there being a further 26 per cent in Queensland and 22 per cent in New South Wales. The elevated levels of claims in Victoria is linked to the troubles in the construction sector in that State.

These numbers for the TCRI pre-date the news of a further slowing in economic growth which is unfolding in the latter part of 2023 as the impact of the Reserve Bank’s interest rate hiking cycle, including the latest 0.25 basis point rise in early November.

As the economy slows into year end and according to the RBA’s own forecasts, into the first half of 2024, businesses will face increasing financial stress which will increase the risk of further increases in trade credit risks in the short to medium term.

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