Tariffs spell death knell for businesses on the brink

Australia's economy is expected to grow at 2.2 per cent over 2025, Westpac and the Melbourne Institute find in their leading index of economic activity.

That's a solid improvement on the 1.3 per cent growth recorded in 2024 and better than the 1.9 per cent figure predicted for 2025 by international economic institution the OECD.

But that would still be slower than Australia's typical growth rate of 2.5-3 per cent, said Westpac Economics head of Australian macro-forecasting Matt Hassan.

"Importantly, the component detail suggests the improved growth pulse is more fragile than it looks," he said. 

"Much of the gain reflects a firming in commodity prices and a lower Australian dollar that may now be largely behind us."

As those tailwinds die down, the shock of US tariffs on global growth will likely become a significant dampener on economic activity in Australia, Mr Hassan said.

That could be the straw that breaks the camel's back for many Australian firms on the brink of going bust.

Businesses already struggle to pay their trading partners because of tough economic conditions, with CreditorWatch's February Business Risk Index recording a 47 per cent increase in invoice payment defaults in the 12 months to February 2025.

US President Donald Trump's imposition of 25 per cent tariffs on steel and aluminium imports and threats of broader imposts risk a bumpier landing for Australia.

This could have consequences for business confidence, share prices and employment, which could result in more insolvencies, CreditorWatch chief executive Patrick Coghlan said.

"We certainly hope that the worst-case scenario of a global recession doesn't eventuate, but businesses should nevertheless be taking steps now to manage that risk," he said.

Recent income tax and interest rate cuts may have offered some help for businesses as they struggle to meet tax debts and cost pressures.

The increase in trade payment defaults is a bad omen, however, as it strongly correlates with businesses becoming insolvent or voluntarily closing in the following 12 months, with the risk of insolvency rising from 0.7 to 7.9 cent when a business defaults.

Businesses in western Sydney and Queensland's southeast are at greatest risk of failing as they are more exposed to construction and generally have lower income levels.

If tariffs are raised on other goods, the indirect impacts will likely deepen the credit cycle. But even if Mr Trump walks away from tariffs, the economic situation could still be difficult to manage, CreditorWatch warned.

Treasurer Jim Chalmers has condemned the trade measures as a form of "economic self-harm" and says trade restrictions will mean less growth and more inflation.

The coalition has criticised the federal government for failing to secure an exemption as it works to sharpen its attack and economic pitch to voters ahead of the election in the coming months.

Shadow treasurer Angus Taylor has been under pressure to reveal how the opposition would manage cost-of-living issues.

Asked about his economic policy, Mr Taylor said the coalition had opposed $100 billion in Labor spending announcements and "won't spend money on ... frolics that are not going to strengthen our economy".

Quizzed on reports the coalition was looking to pump an additional $15 billion a year into defence to boost spending to 2.5 per cent of GDP, Mr Taylor pledged a better budget bottom line if he became treasurer.

Australian Associated Press