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Speaker 1: Welcome to Fearing Greed Q and A, where we ask

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Speaker 1: and answer questions about business, investing, economics, politics and more.

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Speaker 1: I'm Sean Aylmer. Australia's small and medium sized businesses are

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Speaker 1: under pressure right now. High rents, insurance bills, wage and

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Speaker 1: energy price hikes and cost of living pressures are impacting

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Speaker 1: cash flow and it's leading to a divergence in the economy,

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Speaker 1: with businesses in our high cost capitals showing a higher

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Speaker 1: failure rate than in regional areas. Ivan Calhoun is the

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Speaker 1: chief economist at creditor Watch, which has today released it's

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Speaker 1: November Business Risk Index. Ivan, Welcome to Fearing Greed Q

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Speaker 1: and A.

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Speaker 2: Today, Sean, thanks for having me on.

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Speaker 1: So just how much pressure our smmes under at the moment?

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Speaker 3: Look, I think they've been under quite considerable pressure for

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Speaker 3: really twelve to eighteen months. When we try to model insolvencies,

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Speaker 3: the two dominant factors have been interest rates and costs

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Speaker 3: effectively inflation. So I think when I started twenty twenty

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Speaker 3: five and thought about what were the big forces affecting

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Speaker 3: the outlook, I did still have the big rises in

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Speaker 3: prices and costs that we saw out of COVID and

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Speaker 3: you hear we hear a lot about the cost of

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Speaker 3: living affecting consumers. Obviously, the flip side of that, or

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Speaker 3: the other side of the coin is anything that's a

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Speaker 3: cost of living is also a cost of doing business.

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Speaker 3: And during your introduction you talked about insurance and electricity,

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Speaker 3: all of those factors also affect businesses. And then of

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Speaker 3: course wages have gone up a lot in that period

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Speaker 3: as well.

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Speaker 1: Okay, so in a sense we're kind of putting in

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Speaker 1: the costs that we all feel every day are the

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Speaker 1: same as as businesses feel. But in some markets is

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Speaker 1: it harder than others. So that this month's index suggests

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Speaker 1: that Sydney, Brisbane and Melbourne, I think that's kind of

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Speaker 1: where it's toughest of all.

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Speaker 3: Yeah, and that's a relative thing. I think if you

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Speaker 3: looked between the capital cities, you would say that Sydney

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Speaker 3: has the highest costs.

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Speaker 2: So we can understand that a little bit.

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Speaker 3: Rents are higher, mortgages are higher, so the impact of

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Speaker 3: interest rates and rent rises tends to be bigger. We

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Speaker 3: can also find that the bigger capital cities tend to

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Speaker 3: have a little bit more competition. There's more businesses there

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Speaker 3: and some of the smaller regional centers don't have as

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Speaker 3: much competition, and they'll typically have businesses that have been

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Speaker 3: around for a lot longer. And if you have an

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Speaker 3: established brand and obviously you've managed a business for a

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Speaker 3: long time, it tends to.

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Speaker 2: Be a little bit more secure as well.

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Speaker 3: So we can look at those themes as running through

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Speaker 3: the data. And I think also Western Australia in most

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Speaker 3: of the economic data has been doing a bit better

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Speaker 3: than the rest of the other states, so that tends

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Speaker 3: to explain why it's doing a little bit better in

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Speaker 3: the numbers. And also I think South Australia, apart from

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Speaker 3: being a bit smaller, it's also had very very strong

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Speaker 3: population growth, so you can find that population growth has

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Speaker 3: been quite different. It's been better in Western Australia, better

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Speaker 3: in South Australia, better in Queensland than the other state capitals.

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Speaker 1: What about regional areas generally, are they finding it easier

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Speaker 1: because of lower costs though I'm sure energy and insurance

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Speaker 1: and all those costs no difference for them to capital cities,

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Speaker 1: and they don't have the population of course to sell

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Speaker 1: stuff to either.

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Speaker 3: Yeah, it tends to be a bit of the lesser

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Speaker 3: competition story is quite important there. You're right, a lot

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Speaker 3: of those costs will have gone up, but the rental

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Speaker 3: levels are typically a lot lower. In regional areas where

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Speaker 3: there has been a bit more pressure is probably some

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Speaker 3: of the lower income metropolitan regions we've certainly seen Western

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Speaker 3: Sydney and Southeast Queensland have been spots where there's been

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Speaker 3: higher business failure rates. Now we think part of that

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Speaker 3: is related to exposure to the construction sector, which has

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Speaker 3: been amongst the highest rates of insult not rates of insolvencies,

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Speaker 3: levels of insolvencies, and just generally also lower income tends

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Speaker 3: to make a business or the businesses in those lower

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Speaker 3: economic income areas tend to be have a slightly higher

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Speaker 3: business failure rate. We've seen that over many, many years.

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Speaker 1: I haven't you've worked in big banks, you worked in airlines.

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Speaker 1: You're now kind of looking at the SME market. Is

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Speaker 1: the SME market a very discrete market compared to the

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Speaker 1: rest of the economy or does it sort of you know,

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Speaker 1: rising what is that rising tides floats or boats, or

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Speaker 1: maybe falling tides hurts all boats, whichever it is. I'm

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Speaker 1: just interested how different SMEs are look, I.

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Speaker 3: Tend to think SMEs aren't super different. They don't generally

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Speaker 3: have as big buffers as big businesses do. They probably

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Speaker 3: don't have the resources. That said, there's some very very

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Speaker 3: well run small businesses.

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Speaker 2: There's some very very.

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Speaker 3: Well run big businesses and medium businesses. But the economy

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Speaker 3: is the sum of all the businesses in it.

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Speaker 2: So it's a sub sector.

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Speaker 3: It can sometimes lead the economy down it because it

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Speaker 3: doesn't have as much resilience as some.

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Speaker 2: Of those big businesses. So I think that would be.

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Speaker 1: Fair to say thank you for listeners. Ivan has actually

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Speaker 1: at an airport in Tasmania, which is what the background

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Speaker 1: noise was there before I let you go twenty twenty six.

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Speaker 1: What's looked like for SMEs and insolvencies.

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Speaker 3: Yeah, look, it's interesting insolvencies have been trending a bit

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Speaker 3: lower recently. I put that down to the reduction cuts

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Speaker 3: in income tax in the middle of last year and

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Speaker 3: also the interest rate cuts that we've seen.

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Speaker 2: The RBA delivered this year, so they've been helpful. So

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Speaker 2: we've seen that.

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Speaker 3: We've seen also the boom in AI investment defense spending

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Speaker 3: overwhelm mister Trump's tariff EFFIX, so that was this year.

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Speaker 3: If we look forward to the big forces for next year,

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Speaker 3: I think the cost of living, the cost of doing business,

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Speaker 3: it's still there.

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Speaker 2: It's not going away.

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Speaker 3: It's quite possible the Reserve Bank will decide it shouldn't

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Speaker 3: have cut interest rates as much as it did this

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Speaker 3: year because inflation is still quite high.

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Speaker 2: So that's an unwelcome.

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Speaker 3: Development late in the year and it may see the

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Speaker 3: Reserve Bank unease some of those cuts, so that's not helpful.

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Speaker 3: Having said that, there is some good news. I think

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Speaker 3: some of the mining commodity prices have arisen quite a lot,

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Speaker 3: which is showing up a bit in West Australia and

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Speaker 3: Queensland as we speak. I think constructions looking a bit

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Speaker 3: better as well. We're seeing the federal government spending a

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Speaker 3: lot on housing, so I think it's going to be

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Speaker 3: a situation where we think insolvencies plateau rather than fall

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Speaker 3: a lot. They're not super high, it should be said

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Speaker 3: when you express it as a share of all the

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Speaker 3: businesses in Australia, which is now a very large economy

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Speaker 3: with an awful lot of businesses, so it's not diabolical,

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Speaker 3: so more leveling out and an economy with you know

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Speaker 3: some pressures, but not not horrendous and not fantastic.

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Speaker 1: Either, Ivan, thanks for talking to fear and greed.

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Speaker 2: Thanks for having me along, Sean.

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Speaker 1: As Ivan Calhoun, chief economist at Credit or Watch. And

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Speaker 1: a reminder to please always seek professional advice before making

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Speaker 1: any investment decisions. I'm Shanelma and this is fearing greed

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Speaker 1: Q and a