Australia energy shock raises insolvency risk for firms

Australia's energy shock is increasing pressure on businesses and raising the risk of more insolvencies over the next 12 months, according to CreditorWatch. Its March Business Risk Index suggests warning signs had emerged even before the latest escalation in the Middle East.

The data points to deteriorating payment behaviour and persistently high Australian Taxation Office tax defaults, which are stronger early indicators of business distress than headline insolvency figures at this stage of the cycle.

Higher fuel and power costs are adding to an already difficult environment shaped by elevated interest rates and weak consumer demand. The burden is falling unevenly, with sole traders and smaller operators showing less resilience than larger incorporated businesses.

Trade payment defaults improved slightly in the four weeks to mid-March compared with February, but remained elevated. ATO tax defaults also posted another high reading in March, with four of the past six months above levels seen for much of 2025.

Both measures are closely watched as signs of possible insolvency over the following year. Insolvency data itself has been volatile in recent months, but the overall picture still points to elevated levels and a possible upward trend that began before the latest jump in energy prices.

Sectors under pressure

Retail and transport, postal and warehousing were identified as sectors where insolvency trends were worsening. Construction and food and beverage services were also under pressure, although insolvencies in those sectors remained elevated rather than continuing to deteriorate.

Diesel prices were singled out as a particular concern. The larger rise in diesel costs is flowing quickly into business expenses and consumer prices through fuel surcharges, creating sharper pressure in energy-intensive industries and freight-heavy parts of the economy.

Oil prices partly retraced after a ceasefire allowed safe passage through the Strait of Hormuz, but they remained above pre-conflict levels. Much of the near-term outlook depends on whether energy supply routes stay open and whether damage to Middle East energy infrastructure proves lasting.

CreditorWatch outlined two broad scenarios: a quick resolution leading to lower energy prices, or an extended disruption that would drive prices much higher and increase the chance of recession. It said Australian businesses had already experienced some effects of the more severe scenario through higher petrol and diesel prices and, in some areas, tighter supply.

Sole trader strain

The report draws particular attention to sole traders, which account for 30% of all businesses in Australia but 54% of businesses with tax debt defaults above AUD $100,000. That share has been rising steadily, while ATO defaults among non-sole trader businesses have remained relatively stable.

Other data cited in the report highlights that group's exposure. Australian Bureau of Statistics figures show the survival rate for sole trader businesses from June 2021 to June 2025 was 50%, compared with 68% for all companies.

For sole trader businesses established in the 2021-22 financial year, only 38% were still operating in June 2025. The report also cited Australian Financial Security Authority figures showing business-related personal insolvencies rose 52% from FY21 to FY25, indicating that business distress is increasingly spilling into household finances.

Sole traders often lack the capital buffers and legal separation available to incorporated businesses. As a result, tax liabilities can build directly against day-to-day cash flow, making tax arrears both a sign of stress and a factor that deepens it.

Patrick Coghlan, Chief Executive Officer at CreditorWatch, said the strain is becoming more visible in core business metrics. "Small businesses are facing a much tougher operating environment than they were a year ago, and the pressure is showing in cash flow, payment defaults and tax arrears. Rising costs and higher interest rates mean even small shifts in business conditions can have outsized effects, particularly for sole traders.

"What matters is identifying those warning signs early, because once stress becomes visible at the insolvency stage, options narrow very quickly," Coghlan said.

Credit outlook

Ivan Colhoun, Chief Economist at CreditorWatch, linked the latest findings directly to interest rates and energy prices, both of which he said had moved against businesses in recent months. That combination points to a weaker credit environment ahead, especially if the current energy disruption lasts longer than expected.

"Our previous analysis identified interest rates and energy prices as key drivers of the trend for insolvencies. Both have developed negatively in recent months, suggesting a less favourable credit environment in the months ahead.

"Hopefully, the two-week ceasefire recently agreed to can develop into a more lasting peace plan, because an extended conflict and closure of the Strait of Hormuz was likely to lead to much higher energy prices and supply interruptions, which would in turn set off a chain of events that would likely see the world and Australian economies end up in recession.

"A relatively quick end to the hostilities and re-opening of the Strait of Hormuz should see energy prices and supplies return toward pre-conflict levels over the next few months and prevent a much bleaker outcome. That would allow pre-crisis economic fundamentals to re-establish," Colhoun said.