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Rising Insolvencies Signal Ongoing Economic Struggle For NZ Businesses

Latest insolvency figures reveal NZ businesses are continuing to feel the economic strain, with most sectors seeing year-on-year increases in business failures.

BWA Insolvency's Quarterly Market Report for the period January to March 2024 shows a 10% rise in insolvencies compared to last quarter and a 28% increase year-on-year.

There were 553 insolvency cases reported in Q1 2024, up from 432 in the same period last year and up from 501 in Q4 2023. While the signs point towards increased hardship for the country's businesses, the report's author urges observers not to jump to conclusions based on these figures alone.

"While the 28% yearly increase in insolvencies appears significant, a closer comparison reveals only a 2% increase from the third quarter of 2023," says BWA Insolvency principal Bryan Williams. "It is important to look at the overall picture."

A notable spike in the data is in voluntary administrations (VAs), which have surged by 317% this quarter compared with the same period last year, increasing from six to 25.

"This can be interpreted as good news," Williams explains. "It suggests that more insolvency practitioners are being consulted by directors at a stage where the business may still be salvageable, offering them a chance to explore various options beyond immediate liquidation.”

Williams is anticipating a steady increase in insolvency inquiries into the second quarter as current inflation levels and cautious consumer spending persist.

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"Times are tough. International geopolitical events, uncertainty in the U.S., and the prospect of borderless currencies are forcing governments to be cautious. New Zealand's small economy is heavily linked with our trade partners, and this, in turn, affects our stability significantly."

"There is often a significant latency in insolvencies following economic downturns, as it takes time for the adverse financial climate to fully impact business closures."

Business insolvency trends have shown varied movements across sectors compared to the previous quarter (Q4 2023) and the same quarter last year (Q1 2023). In the construction sector, there was a 4% decrease in insolvencies from 131 to 126 this quarter, yet a 10% increase from 115 last year. Retail sector insolvencies decreased by 6% from 33 to 31 this quarter and 9% over the past year. In contrast, business services reported a sharp increase, with insolvencies climbing by 52% from 48 to 73 this quarter and 66% from 44 the previous year.

The transport and delivery sector experienced a significant rise in business failures this quarter, up by 127% from 11 last quarter and 79% from 14 the previous year, reaching 25.

"As the economy contracts, it naturally impacts service providers. Reduced consumer spending means less demand for transporting goods, leading to more downtime for transport businesses where they aren't earning but still incurring costs. Coupling this with rising interest rates on debts, it's evident why many companies in this sector are struggling with insolvency."

Williams expects the outlook to remain sombre across all sectors as consumer spending tightens further.

"In addition to the economic and market challenges, seasonal factors come into play. As we head into winter, business naturally subsides, compounding the stress already placed on weakened balance sheets from the pandemic," explained Williams.

"The construction sector is particularly vulnerable as costs rise and budgets are strained. The full impact of these increases will soon become evident, particularly painful for many as projects end and bills come due."

"The sky is not going to fall in, but it is going to get chilly. A day of reckoning is on its way for companies not compliant with their obligations, as patience wanes and enforcement tightens."

"Businesses are urged to brace for challenging times ahead and consider early interventions to manage financial health."

See the BWA Insolvency Quarterly Market Report here.

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