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Recession could hit more than 1 in 10 businesses

Up to 15 per cent of businesses in some sectors of the Australian economy are expected to fail as the full brunt of the COVID-19 crisis comes home to roost next year, the Reserve Bank has said.

While Australian businesses had low levels of debt going into the crisis, and income support measures, rental relief and loan deferrals have helped them stay above water through the pandemic, the RBA believes that time has now run out. 

“At least 10-15 per cent of small businesses in the hardest-hit industries still do not have enough cash on hand to meet their monthly expenses,” the RBA said. 

“These businesses are in a tenuous position and are particularly vulnerable to a further deterioration in trading conditions or the removal of support measures.”

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Survey evidence indicates that around 25 per cent of small businesses currently receiving income support would close if support measures were removed before an improvement in trading conditions. 

“Business failures will increase, although there is a high degree of uncertainty about the magnitude and timing,” the RBA said. 

“It will depend on the strength of the economic recovery, which will be influenced by the duration and severity of future COVID-19 related disruptions, and the timing and extent of the unwinding of the various support measures.”

The budget delivered an array of measures aimed at small and medium-sized businesses, including a massive instant asset write-off scheme and tax concessions. The JobKeeper subsidy has also been integral to preserving businesses, with the RBA estimating that an additional 4,600 businesses would have failed without it. 

“However, the actual failure rate since the pandemic has been lower than can be explained by these support policies,” the RBA said.

“Most of this ‘failure gap’ between actual and estimated failures can be attributed to the temporary insolvency relief.”

A NAB survey indicates that around three in 10 Australian businesses now expect to have to restructure their service or product offerings to meet changing needs in the next 12 months, while almost one in 10 businesses believe they will have to close permanently.

Recession could hit more than 1 in 10 businesses
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