In an address to Ayr Chamber of Commerce Event, RBA assistant governor Michele Bullock revealed that while businesses have experienced huge disruptions, either through enforced lockdowns or consumers choosing to restrict their movements, cash flow has increased and, as a result, business cash buffers have been boosted.
According to the RBA, prior to the pandemic, around half of businesses had only enough cash on hand to pay one month’s expenses and around one-quarter had enough cash to cover more than three months.
But, by October, more than 60 per cent of businesses had enough cash on hand to cover three or more months of expenses.
“This will be helpful during the recovery,” Ms Bullock said.
But despite policy support, RBA data underlines the devastating impact on small businesses, revealing that revenue has fallen in aggregate by close to 15 per cent since March. In industries such as arts and recreation, and accommodation and food services, the declines in sales have been even bigger.
As such, Ms Bullock said that some businesses are facing very challenging circumstances, raising questions about their capacity to service their debt once the various measures of assistance are wound back.
“Business failures will increase even as the economy starts to recover,” she said.
“The pace of the recovery will clearly be important as will the extent and timing of the unwinding of the various support measures.”
While business failures are currently much lower than usual because of income support, Ms Bullock noted that this can’t last.
“Survey evidence suggests that around a quarter of small businesses that are currently receiving income support would close if support were removed now and trading conditions had not improved,” she revealed.
“The economic recovery is expected to be unpredictable and uneven, so there will be rising business insolvencies and problems for some households in servicing their debts.”
But the RBA sees the country as technically out of a recession, with RBA deputy governor Guy Debelle revealing that Victoria’s impact on the economy has not hurt overall economic growth.
“At the moment, it looks like the September quarter for the country probably recorded positive growth rather than slightly negative,” Mr Debelle said before a Senate estimates hearing earlier this week.
“The growth elsewhere in the country was more than the drag from Victoria, and the drag from Victoria was possibly a little less than what we guessed back in August.”
A recession is defined as two consecutive quarters of economic contraction, which occurred in Australia when gross domestic product (GDP) contracted 0.3 of a percentage point in the March quarter and a record 7.0 per cent in the June quarter.