As the Reserve Bank board braces for another interest rate decision tomorrow and over-borrowed interest rate worriers pray for no change, the news is growing that10 interest rate rises are starting to bite, big time.  One industry expert called it an “insolvency Armageddon” with cash-troubled business wind-ups reaching 828 in March, after starting the year with 359 insolvencies in January and 692 in February.

But it’s not just a sad consequence of Dr Phil Lowe’s interest rate rises. “Scott Taylor, partner at insolvency and reconstruction law firm Taylor David Lawyers, said that nearly 5,000 firms had avoided insolvency because of government support programs including JobKeeper,” Stephen Brook and Bianca Hall of the SMH reported. He’s the one who tagged what he’s now seeing as “insolvency Armageddon”.

The role of JobKeeper in keeping us from going into a deep recession or even a Great Depression was lost on too many people. Even if you have reason not to be a Scott Morrison fan, JobKeeper and former Treasurer Josh Frydenberg’s role shouldn’t be under-appreciated.

Taylor thinks JobKeeper saved 5,000 businesses from liquidation, which meant a hell of a lot of jobs as well.

JobKeeper was a life, job and business saving initiative. The stock market rebound (shown graphically below) wouldn’t have happened without it.

And unemployment would never have fallen like this (see the chart below) without JobKeeper.

Unemployment:

Yesterday I went to a high-end Travel Expo at Sydney’s Hyatt Regency put on by Travel Associates. The place was packed with would-be travellers seeing what luxurious offerings were out there waiting for them to jump on board.

If these people had seen a great recession, the devastation of their super funds, unemployment (with two years living on the dole and all the historical consequences of recessions) without something like JobKeeper, then that event wouldn’t have happened!

Interestingly, we learnt on the weekend that the upcoming Budget on Tuesday week, is heading to the first surplus in 15 years. That wouldn’t have happened if unemployment hadn’t have fallen (like the chart above shows).

“Inflation and the ultra-low unemployment rate of 3.5 per cent are lifting tax revenue and reducing welfare payments, while the return of hundreds of thousands of migrant workers is delivering a bigger fiscal dividend,” the AFR’s John Kehoe reported. “The federal budget recorded a surplus of $1.6 billion for the 31 days of March – typically a month that delivers a deficit – and was narrowly in the black over the past 12 months, Department of Finance figures published on Friday showed.”

I think this from Kehoe shows how avoiding a serious recession that would’ve smashed businesses and jobs, shows the value of JobKeeper: “The budget is on track for an $80 billion turnaround since former treasurer Josh Frydenberg’s pre-election budget in March last year originally forecast a deficit of $78 billion for 2022-23, which was lowered to a deficit of $36.8 billion in October by Dr Chalmers,” he explained.

The combined effect of better-than-expected commodity prices, inflation that has pushed up incomes and a record surge of overseas arrivals have all helped the budget bottom line.

But some businesses in construction, food, accommodation, retail, manufacturing and transport are struggling.

It’s no surprise that rising interest rates would be killing builders, with the likes of Porter Davis and Mahercorp failing in recent times. And the food delivery business Providoor has bitten the dust. And there’d be a pile of businesses in the CBD that have been caught between residual rent bills from the lockdown period and the fact that so many employees are now working from home.

High interest rates are making people take their lunch to work and ‘at home’ dinner parties are becoming more popular, which isn’t helping higher-end restaurants.

As I always remind you, the mortgage cliff (when fixed rate home loan borrowers go on to higher variable rate loans) will make this negativity, slowing economic activity and insolvencies climb even higher, which would have to be a big topic for discussion at tomorrow’s RBA board meeting.

If the RBA keeps raising rates and the mortgage cliff is steeper than we’re all hoping, then an expected economic slowdown will become a recession. Tomorrow’s interest rate decision cannot easily ignore this insolvency escalation.

By the way, I’ll be working with the Association of Independent Insolvency Practitioners (AIIP) on 13-14 July 2023 at their annual conference at Canberra Hyatt. Senator Deborah O’Neill, chair of the Parliamentary Joint Committee on Corporations and Financial Services inquiry into corporate insolvency in Australia, will be Keynote Speaker and I’ll be hosting a panel, which, time permitting, the Senator will participate, along with Australian Small Business and Family Enterprise Ombudsman Bruce Billson. Also on the panel will be Professor of Corporate Law at University of Sydney Jason Harris; Maria O'Brien, Chair, Turnaround Management Association and Australian Head of Restructuring & Insolvency at Baker McKenzie; Anthony Warner, Vice President AIIP, Director CRS Insolvency and David Levi, Chair.

When the Senator chaired a Commonwealth Inquiry into insolvencies, the Inquiry received over 100 submissions reflecting its terms of reference and interest.

Given the story I’ve just written I’ll be listening carefully to the Panel’s insights on what needs to be done.

If you want to know more, go to www.aiip.org.au