Recently Sean Aylmer from the podcast “Fear and Greed” interviewed Patrick Coghlan who is the CEO at Creditor Watch.  Here are some summary highlights from the interview:

The recent interest rate cut has provided some relief for homeowners, but what does it mean for small and medium-sized businesses (SMEs) in Australia? While positive indicators were observed at the end of 2024 and early 2025, their long-term sustainability remains uncertain. CreditorWatch’s latest Business Risk Index, released today, sheds light on the economic conditions and challenges faced by businesses across various sectors.

The Psychological and Financial Effects of Interest Rate Cuts

According to Patrick Coghlan, CEO of CreditorWatch, the immediate impact of an interest rate cut on SMEs is largely psychological. It signals that economic conditions may be improving and that the worst may be over. This sentiment can boost consumer confidence, encouraging discretionary spending, particularly in industries like hospitality.

However, the tangible financial benefits take longer to materialise. The true economic impact will only be felt after multiple rate cuts, as additional funds gradually flow into consumers’ pockets, increasing their spending power.

Business Performance: Key Insights from the Business Risk Index

Stabilisation in Insolvencies and Trade Payment Defaults

One of the key takeaways from the latest Business Risk Index is the stabilisation of trade payment defaults and insolvencies. While December and January are typically volatile months, the current trend suggests that businesses may be experiencing a period of relative stability. Retail sales have shown signs of strength, although business arrears and court actions continue to rise, indicating persistent financial pressures.

Sector-Specific Performance

The report highlights disparities between industries:

• Performing Well: Manufacturing, agribusiness, and healthcare have shown resilience. Agribusiness, in particular, has seen improvements after years of weather-related hardships.
• Struggling Sectors: Hospitality remains the most affected industry, as discretionary spending remains subdued. The construction sector presents a mixed picture—while commercial construction shows some strength, the residential segment is facing significant challenges due to high costs and reduced consumer spending.

The real estate sector also reflects these struggles, with residential property investment slowing more than commercial and retail property.

Key Factors Shaping the Business Landscape in 2025

Looking ahead, several macroeconomic and political factors will shape the business environment in Australia:

1. Interest Rate Trajectory

Businesses are hoping for additional rate cuts to ease financial burdens. Lower interest rates would reduce borrowing costs and boost both consumer and business confidence, facilitating investment and expansion.

2. Inflation and Consumer Spending

While inflation remains a concern, ensuring it remains under control is crucial for economic stability. Confidence in stable or decreasing inflation levels would encourage businesses to invest and consumers to spend more freely.

3. Capital Markets and Investment Trends

Currently, significant capital is being held back by investors, private equity firms, and venture capitalists due to economic uncertainty. As conditions stabilise, increased capital deployment could lead to business expansion, new ventures, and job creation.

4. The Impact of Political and Regulatory Changes

The upcoming federal election introduces potential economic uncertainty. While elections generally lead to a temporary slowdown in business activity, the bigger concern lies in potential political gridlock. A hung parliament or minority government could delay legislative changes and create regulatory uncertainty, affecting industries such as construction and retail.

Additionally, industrial relations reforms and increasing red tape may discourage hiring and investment, particularly in sectors that rely heavily on labour.

5. Global Factors: The Donald Trump Effect

Internationally, the potential return of Donald Trump as U.S. president raises questions about trade policies and economic shifts. However, Australia’s economy, heavily reliant on natural resource exports, is expected to remain resilient regardless of U.S. political changes.

The Business Outlook for 2025

While some positive trends are emerging, the first half of 2025 is expected to remain challenging for SMEs. Even with additional rate cuts, the trickle-down effect on consumer spending will take time.

As the financial year progresses, businesses may see improvements as economic conditions stabilise and both consumer and commercial spending increase. Increased hiring, capital investment, and business expansion are anticipated, though businesses will remain cautious until economic and political uncertainties subside.

Conclusion

While the recent interest rate cut offers a glimmer of hope, Australian businesses continue to navigate a complex and uncertain economic environment. Stability in insolvencies and trade payment defaults is encouraging, but ongoing challenges in inflation, regulatory changes, and political uncertainty mean that businesses must remain agile and prepared for shifting conditions.

The next 12 months will be critical in determining whether these positive indicators translate into sustained economic recovery or if further challenges lie ahead for SMEs in Australia.

If you need qualified accounting advice on how to take advantage of reduced interest rates in your business, contact us here.

(Disclaimer: The views in the blog post are not necessarily reflective of the views of Keypoint Accountants.)