Wednesday, 16 August 2023

The economic tide is turning  

More than 90 per cent of management and turnaround professionals believe there is potential for Australia to dip into recession within the next two years, with 70 per cent anticipating a recession is likely within the next 12 months, according to the latest annual Turnaround Survey conducted by KordaMentha and Turnaround Management Association ('TMA') Australia. 

The 2023 Turnaround Survey also reveals industry sentiment is lowest in the survey’s five-year history – considerably lower than the previous dip in 2020 due to impacts of the Covid-19 pandemic – with the business community anticipating more corporate distress and insolvencies and increased inflation in the coming year as the economy “normalised” and returned to a “real world setting”. 

“The 2023 KordaMentha and TMA Turnaround Survey shows the business community is predicting some tough times ahead as the economy normalises after the artificial stimulus caused by Covid. This is not a doomsday spiral, instead we believe it is just the economy getting back on a real world setting post-Covid which cannot be achieved without some pain,” said James Wagg, Executive Director Performance Improvement at KordaMentha. 

“We’ve been operating in an artificial economic environment due to the impacts of Covid. The government subsidies followed by increased revenues have had a positive impact on profitability, which means many businesses have not been focusing on costs.” 

The survey showed one third of businesses believed inflation would continue to rise, while half believed it would remain static, and almost three-quarters forecast an increase in distressed M&A transactions in the same period. 

While the survey’s purpose is to assess turnaround activity, it has just as much to say on business sentiment and the strength of the economy. “  

“During and post Covid we had supply chain issues, which affected costs for manufacturing. Now rising interest rates and inflation with resulting cost increases are causing a drop in discretionary spending and profitability. Wage increase decisions are causing pressure in service industries as well, and increasing interest rates have made access to finance more difficult. So many borrowers have been forced to the secondary, more expensive money market.” 

The survey predicts an increase in insolvencies and M&A activity in the next year. “Strong Mergers and Acquisitions activity since Covid has been from companies seeking to grow, prompted by buoyant conditions and the availability of low interest funds. Now it’s the reverse. Companies will be seeking to contract, prompted by distress and the need to liberate capital or lower costs.”  

James said this was happening with a waterfall effect. “Construction was the first industry to be affected, unable to pass on rising costs due to fixed price contracts. We are now seeing other industries affected, like retail impacted by increased cost of living and reduced consumer spending. The next are likely to be services industries such as health, as government funding fails to keep up with increasing costs. It’s trickling through the economy.” 

The complete survey report is available here. 

Download Survey Report