Small business braces as ‘major setback’ looms: RBA’s Philip Lowe

Ending lockdowns as soon as safely possible is essential for the many small businesses in ‘wait, survive and see’ mode, Reserve Bank governor Philip Lowe has warned.

Philip Lowe says ‘for some businesses, there is a limit to how long they can wait’. Picture: James Brickwood.

Reserve Bank governor Philip Lowe says ending Delta lockdowns as soon as safely possible is essential for the many small businesses in “wait, survive and see” mode, warning that “there is a limit to how long they can wait” for restrictions to ease before they fold.

As ACT Chief Minister Andrew Barr locked down the nation’s capital for at least an extra four weeks, despite nation-leading vaccination rates, Dr Lowe said larger firms were managing the Delta disruptions relatively well but “many small and medium-sized businesses are facing very difficult conditions”.

“Many are in ‘wait, survive and see’ mode, having experienced a large drop in revenue,” he said.

“Government assistance is helping, but the longer they have to wait before reopening, the more difficult things will become and the greater the potential damage to this important part of the economy. For some businesses, there is a limit to how long they can wait. So the sooner we can open safely, the better.”

The Australian revealed on Tuesday that small businesses in customer-facing industries in locked-down states were experiencing a severe cash crunch of 30-50 per cent, according to data from accounting software provider MYOB.

In his annual address to the Anika Foundation on Tuesday, Dr Lowe said the economy would “contract significantly” over the three months to September, and “it would not be surprising to see (unemployment) in the high fives for a short period of time” versus the most recent reading of 4.6 per cent in July.

More positively, Dr Lowe said vaccinations provided “a clear path out of the current difficulties” and that the nation “will return to a stronger economy next year”.

“The exact magnitude of the economic contraction in the September quarter remains to be determined but it is likely to be at least 2 per cent, and possibly significantly larger than this.

This is a major setback, but it is likely to be only temporary,” he said.

“We expect the economy to be growing again in the December quarter, with the recovery continuing into 2022. Delta is delaying progress but it is not expected to derail our resilient economy.”

With Delta effectively putting back Australia’s economic recovery back by one year, the RBA boss reiterated that rates would likely not need to rise until 2024.

Key to this forecast was the fact wages growth was not expected to accelerate quickly to above the 3 per cent level required to drive inflation sustainably back within the central bank’s 2-3 per cent target range

Dr Lowe was unusually blunt in hosing down investor expectations that rates would rise to 0.25 per cent by the end of 2022, and to above 1 per cent by the end of 2024.

“These expectations are difficult to reconcile with the picture I just outlined and I find it difficult to understand why rate rises are being priced in next year or early 2023,” he said. “While policy rates might be increased in other countries over this timeframe, our wage and inflation experience is quite different.”

Dr Lowe conceded that the ­reality of having to live with some level of Covid could make for a slower recovery as restrictions eased, but that the precedent of other countries successfully reopening with some level of disease provided a hopeful precedent for Australia.

“This experience suggests that having Covid-19 circulating in the community does not prevent a quick bounce back in spending, provided the population is highly vaccinated,” Dr Lowe said.

“Most people are keen to do the things they used to and they will spend if they have the opportunity and the income.”

“My expectation is that the same will be true here, although we still cannot be sure exactly what living with Covid-19 will look like in Australia.”