A leading lender for Australian small and medium sized businesses is expecting challenges for its client base as interest rates rise seemingly ever higher, but not widespread business failures or a deep recession.
Judo Bank chief risk officer Frank Versace told reporters on Friday that while the forward outlook was challenging, many businesses were starting from a position of strength.
"Up until now, certainly for our client base, I think COVID provided an opportunity to improve the resilience of their businesses, a lot of recapitalised balance sheets and an opportunity to fortify their business models, and there was a fair bit of government stimulus," he said.
While the forward outlook is more challenging, Mr Versace said that Judo doesn't see "systemic deterioration".
"We do think there'll be pockets of distress," he said, particularly in the discretionary retail sector as higher interest rates take a bite out of consumer spending in a bid to combat inflation.
It's also possible that commercial property will come under pressure as rates rise, because there's an inverse valuation between property yields and valuation, Mr Versace said.
"So I think there'll be pockets of distress, but we don't see a wholesale deep recession."
Judo Bank CEO Joseph Healy noted that Australian household debt was the highest of any nation in the developed world and higher rates were having an impact. The cash rate has gone from 0.1 per cent to 4.1 per cent over the past 14 months.
"When you've gone from an interest rate environment such as the one we had a year ago to the one that we are now looking into - and it's gone so quickly - and you've got energy bills, household bills all headed in the wrong direction, that has to have an impact on those sectors of the business community that rely on discretionary expenditure," Mr Healy said.
Mr Healy said that Judo Bank wasn't forecasting a "hard landing," although a mild recession was possible.
"But there will be sectors of the economy that will find it tough," he said.
The business leaders were speaking at the launch of the bank's SME Purchase Managers Index Business Activity Report, the first of its kind to measure Australian business activity in the small and midsized business sector.
