Economic and Financial Market Update: Risky Business


  • Last year saw a jump in the number of companies in Australia;
  • Construction is the industry with the highest number of firms. The sector that saw the biggest increase last year was Other Services (repairmen); 
  • Company exit rates declined in the last financial year driven by government income support and the sharp economic rebound;
  • Strong expected capex spending is a sign of firms’ confidence about the medium-term outlook.

Each year the ABS release a report on the composition of Australian companies. Construction is the sector that has the largest number of firms. There is a big number of professional, real estate and transport firms. Many companies are ‘micro’ firms. The industries with the fewest number of companies are either in the government sector or ones that often require large capital investment.

There was a substantial rise in the number of firms in the 2021 financial year. The sector that saw the largest increase in the number of firms over the past year was ‘Other Services’. The fear of COVID meant there a big drop in demand for taxis and Uber drivers.

A notable feature is that every year there is a large number of firms that enter and exit an industry regardless of the state of the economic cycle. That is a sign of a dynamic economy. 

Entry rates in 2020-21 were near their highest level in over 13 years helped by strong company profitability. That would have also played a role in the sharp decline in exit rates, along with the extremely low level of interest rates, government income support and company debt levels. Over the past five years the sector with the largest entry and exit of firms has been Transport and Administrative Services. The least was farming. Agriculture and mining were the only two sectors where there were more firm exits than entries over the past five years. 

‘Survival rates for firms that have been in business for a while is around two-thirds. It is tougher for new companies with only about 50% of new firms still in business after 4 years. 

Recently a weak Construction Activity report led to some discussion about a low GDP print in the June quarter. A low number would be inconsistent with other evidence from the second quarter. One of the reasons for the softer activity in the construction sector has been that supply has been unable to keep pace with the strong demand

There was positive news that new capital spending by the private sector remained strong in the June quarter. Importantly firms’ across most sectors indicate they still intend to have decent sized capex budgets for the rest of this financial year despite the NSW, Victorian and ACT lockdowns. Growth in spending on plant and equipment is expected to be notably strong.


To read my full update, click here.


We live in interesting times.


Peter Munckton - Chief Economist