Business insolvencies and liquidations are on the rise. Photo / Erwin Wodicka
Business insolvencies and liquidations are on the rise. Photo / Erwin Wodicka
THREE KEY FACTS
Business insolvencies increased by 23% from the first quarter, reaching 700 in the second quarter.
The latest BWA Insolvency Quarterly Market Report shows this is the highest since the second quarter of 2016.
In the second quarter of 2016, GDP grew at an annual rate of 3.6%
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist and also presents and produces videos and podcasts. He joined the Herald in 2003.
OPINION
The number of business insolvencies has soared in the past year.
Between Apriland June, there were 700 insolvencies reported, up 23% from the first quarter of the year and 36% higher than the same period a year ago, according to the latest BWA Insolvency Quarterly Market Report.
There were 635 liquidations in the second quarter of the year, up from 472 in the same period last year.
That’s not so surprising, right? It has been a tough recessionary period. The business headlines have been full of high-profile hospitality failures and construction company collapses.
The BWA report also tells us this is the highest single-quarter figure since the second quarter of 2016.
Let’s back the truck up a bit here. I know things move fast these days but I’m old enough to remember 2016. I’m almost certain I lived through it.
Seriously, after all the madness of the Donald Trump years, the pandemic and the divisive culture wars, it can be easy to forget what a golden era 2016 was.
In September 2016, Barack Obama and his golfing buddy John Key were still in charge of their respective countries. Both economies were humming along.
The world had some structural economic problems with deflation. Oil had slumped below US$50 a barrel. That was keeping interest rates extremely low. The US economy was a little sluggish, growing at around 2%. But Wall Street was booming.
So basically we had cheap petrol, low inflation, low mortgage rates and healthy KiwiSaver accounts ... awful! Meanwhile, in New Zealand, the major political debate of the day was about changing the flag – a manufactured and comical controversy that at least got the nation some coverage on US late-night talk shows.
We were still basking in what was dubbed the “rock star economy” years – largely because we were doing slightly better than Australia for a while.
Former Prime Minister Sir John Key presided over what one bank economist called a "rock star economy". Photo / Greg Bowker
Critics will point to a housing boom, dairy boom and high net immigration but, with annual GDP growth landing at 3.6% for the year to June, it’s hard to make the case that those were tough times, by any measure.
Our GDP growth was near the top of the OECD – ahead of Australia, the US and the UK.
I’ll put away the rose-coloured spectacles now but the point is that comparisons between the business environment now and then don’t seem to make much sense.
What gives? Were business failures unusually bad then? Or are they not really that bad now?
If we look at the annual data since 2001, we can see the long-term trend, which offers a few clues as to what is going on.
Data from the Ministry of Business, Innovation and Employment (MBIE) shows annual figures for business liquidations averaging about 2260 between 2001 and 2007. In 2008, as the Global Financial Crisis (GFC) hit, they spiked to 3258 and they rose again in 2009 to the highest level this century at 3433.
For the record, liquidations, insolvencies and receiverships are all different things but they follow similar patterns (MBIE also tracks receivership data and Centrix does a monthly count of liquidations).
The GFC delivered a massive demand shock that wasn’t met with the same fiscal stimulus as the Covid crisis. The Reserve Bank cut interest rates but monetary policy is slower to transmit.
Thanks to dual monetary and fiscal stimulus, the Covid demand shock was far shallower than the GFC. But we paid the price later as inflation took hold and interest rates had to rise.
Regardless of the differences, in both cases, business failures were a lagging indicator. That means it takes time for them to flow through the economy.
Business owners will naturally do everything they can to hold on through tough times. That includes borrowing more and dipping into their personal wealth. Sometimes they’ll remortgage their homes.
We can see that, after the GFC, business liquidations were elevated for some time. They didn’t fall below 3000 until 2011 and didn’t fall below the pre-GFC average until 2016. Although the economy boomed in 2016, businesses failed at about the long-run average. But they continued to fall from there.
In 2024, business liquidations are rising but from a very low base.
They hit a 21st-century low of 1380 in 2021, at the peak of the Covid stimulus bubble.
So this year the numbers might align with 2016, at around the long-run average, but the direction of travel is very, very different.
It is the relative change that we feel most acutely. Sadly, we’re likely to see the stats around business failure continue to trend upwards for some time yet.
The first Official Cash Rate cut might have shifted some sentiment but that will take some time to flow through to bottom lines.
Last week this column looked at business confidence hitting its highest level in a decade. I made the point that businesses were effectively telling us that conditions can’t get much worse. Confidence surveys measure expectations for the year ahead and they do it in a fairly binary way.
That was one example of the messy nature of the economic data we record. The stats for business failure (whether it’s liquidations, insolvency or receivership) are another.
If you just read the headlines, you could be forgiven for thinking none of it made any sense. But if you just read the headlines, then you’ve only got yourself to blame (I can say that this far down in a column knowing that I won’t offend anyone).
No one piece of economic data paints a full picture of the economy but if we put it all together it starts to make sense.
The good news is that we can now see the start line of the recovery ahead. Unfortunately, many businesses will still struggle to reach it.
Liam Dann is business editor-at-large for the New Zealand Herald. He is a senior writer and columnist, and also presents and produces videos and podcasts. He joined the Herald in 2003. To sign up to his weekly newsletter, click on your user profile at nzherald.co.nz and select “My newsletters”. For a step-by-step guide, click here. If you have a burning question about the quirks or intricacies of economics send it to liam.dann@nzherald.co.nz or leave a message in the comments section.
