[BREAKING] Australia Recession Is Over, Says RBA

SYDNEY (The Australian Financial Review) - Reserve Bank deputy governor Guy Debelle has declared Australia is technically out of recession, telling a Senate estimates hearing that the September quarter would show the economy growing and the drag on the economy from Victoria would be less than first thought.

Illustration photo of Reserve Bank of Australia from Property Club

However assistant governor Michele Bullock has warned that banks profits will come under further pressure due to more losses on souring loans from businesses and households.

"At the moment it looks like the September quarter for the country probably recorded positive growth rather than slightly negative," Dr Debelle said.

"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."

The Reserve Bank's formal forecasts will be revealed next Friday when it delivers its Statement on Monetary Policy.

All the big four banks expect the technical recession is now over, although their chief economists are still cautious about overestimating the recovery, with more than 930,000 people still unemployed.

After recording a 0.3% contraction in gross domestic product in the March quarter and a record 7% fall in the June quarter, the economy marked its first recession in 29 years.

The Reserve Bank's expectation of a positive September quarter indicates the economy is out of a technical recession, regarded as two quarters of economic contraction.

When pressed by Senator Andrew Bragg on whether the Reserve Bank would undertake a significant quantitative easing program next week, despite the economic recovery, Dr Debelle said it was a difficult time to respond to such a question.

"We have a policy decision next Tuesday which is pretty market sensitive so I don't want to provide too much commentary around whether or not that will go ahead."

RBA assistant governor Michele Bullock tempered the outlook in a speech on Tuesday night suggesting that banks would face further losses due to inevitable business failures and mortgage impairments.

"There is going to be further pressure on banks’ profits and capital over the coming year. The main way this will happen is through credit losses – both through business and household loans," Ms Bullock said.

"While not all business failures will result in losses for the banks, it will have an impact on banks’ balance sheets."

"Business failures will increase even as the economy starts to recover. Business failures are currently much lower than usual because of income support, loan repayment deferrals and temporary insolvency relief. But this can’t last and we expect to see failures rise."

The Reserve Bank has already suggested as much as 5,200 businesses could fail.

CreditorWatch Business Risk Review reported that the number of businesses entering some form of administration rose 11% in September to 436. The number of business defaults increased by 23% in the month, the first increase recorded since May.

Ms Bullock said that while a range of income support policies and actions by lenders and landlords had so far provided support, some of these measures will soon come to an end and there is uncertainty about others.

"With a very uncertain economic recovery, this raises issues about the resilience of businesses and households and ultimately about the credit quality of banks’ assets."

"Interest coverage ratios have been falling for a number of years. And despite policy support, 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."

She said around a quarter of small businesses that were currently receiving income support would close if support were removed now and trading conditions had not improved.

She pointed to commercial property being a significant risk but one that banks could cope with.

"Commercial property prices could experience sharp falls in this environment, putting pressure on investors that had borrowed to invest in such property. While banks do not have a large direct exposure to commercial property, impairment rates are likely to rise."

Households would also damage banks profitability.

"The onset of the pandemic-induced recession raises the possibility that some households will be unable to meet their repayments because their incomes have fallen, and so banks will experience an increase in non-performing loans."

"Non-performing loans to households, which had already risen over the past couple of years, are therefore expected to continue to rise over the coming months," Ms Bullock said.

"Not all households will have been able to increase saving and will find themselves in difficult circumstances."

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