Economic Impact of COVID – Chris Hall, CIO Ellerston Capital

The Global Economies
Fiscal and Monetary response
The global Government and Central Bank response to the COVID-19 economic shutdown has been unprecedented. As at the end of April, G20 countries have provided US$7.4 trillion in fiscal support, equating to 10.8% of GDP. This has been undertaken at the same time as continued monetary easing from the world’s Central Banks, with 25 of the top 30 major Central Banks having cut interest rates, many to record lows. When looking at Australia’s response, on a relative basis the Government has committed the 3rd largest economic stimulus package in the world so far, amounting to 7.6% of GDP. To put this in perspective, this is 4x larger than our fiscal response during the GFC.

The economic data is looking very weak.
Reports for Q1 GDP are starting to filter through and, not surprisingly, are showing large contractions and country variance across the board. The US economy is looking at a 5% GDP contraction, whilst the Eurozone has declined 14.5% and China 37.7%. The reason for the difference is explained by the timing of the COVID-19 outbreak and severity of the lockdowns in each jurisdiction. Overall, the global economy is expected to contract by 20% in H1’20, more than twice the rate seen during the GFC. Australia will not be immune, with real GDP expected to contract 7.5% in 2020, and the unemployment rate to exceed 10% for a prolonged period of time. In 2021, Australia will see a recovery in economic growth but is likely to be less than 2%. The medium-term recovery therefore looks more like a “U”shape than a “V” or “L” shape. The service sector is being hit unusually hard, with double-digit annualized declines in healthcare, transportation services, recreation and food services (cafes and restaurants). Similar declines in services consumption elsewhere have been accompanied by a collapse in international trade, especially tourism.

Secular Winners and Losers
It is critical to acknowledge that there will be secular changes to industries as a result of COVID-19. The expected winners and losers are highlighted below:


  1. Technology – Expect greater demand for on-line/virtual/digital services and infrastructure, whether for public health (surveillance), business resilience, education, leisure and medical diagnosis. We are likely to see structurally less demand for ride-sharing and on-line travel.
  2. Healthcare – Expected permanent increase in demand for healthcare services and products (therapeutics, serology tests, vaccine) for both public and private sectors in preparation for the second wave of infection. A negative consequence is we will see less demand for long-term aged care facilities, with a greater focus on “care at home”.
  3. Communication Services – Expected permanent increase in demand for digital interactions (meetings etc), entertainment and gaming.
  4. Consumer Discretionary – Accelerated and likely permanent shift in demand to on-line retail. However, this will be accompanied by less expenditure availability for discretionary spending for a decent amount of time.


  1. Airlines – Long term broader restrictions limiting international air travel until a vaccine is found and is available globally. Multi-lateral guidelines to emerge.
  2. Real Estate – Permanent increase in share of workforce working from home in order to increase business resilience, thereby lowering demand for commercial real estate.
  3. Energy – Permanent decrease in international travel for business and leisure and particularly a negative reassessment of sea travel for leisure, (cruising).  Decrease in road travel due to greater share of labour force working from home (Road 50%, Aviation 10% of global oil demand). Energy prices to remain subdued for an extended period.
  4. Autos – Permanent decrease due to less commuting (work from home) and road tourism (travel restrictions cross border).
  5. Hotels/Restaurants/Leisure/Gaming – Permanent decrease in business & personal travel (International – Older people will not be able to insure), plus shift to on-line entertainment and home dining.
  6. Construction – Structural drop in temporary visas due to immigration cuts, placing pressure on costs.

Longer-term Australian Economic Impact
When looking at Australia’s economic recovery, it is going to take around 3-4 years to get back to a more normalized 2.0% level, which will be the new normal. The Australian savings rate is expected to rise from 3%, pre-COVID-19, to over 10% as consumer confidence and unemployment remain stubbornly strained. It is worth highlighting that during the GFC, Australia’s consumer savings rate went from 3% to 8% and stayed there for 8 years. This is a major reason why we have been in a period of sub-trend growth for such a long time.
A broad-based review of the tax system will occur within 2 years as the Federal Government figures out how to pay for all of this stimulus. We are likely to see a move away from income tax reliance towards asset tax reliance, ie wealth tax and consumption tax (Increase in GST rate).

Critically, we have never been in a time when Government’s (Federal and State) and Central Banks will be so intertwined, given the scale of fiscal and monetary response. Such a vast use of tax payer money to bail out the economies will be accompanied by an unprecedented level of regulation across many industries. Consequently, larger companies will get bigger whilst smaller companies will need to be lean to compete and deal with the increasing regulatory/compliance costs to stay in business.

Getting your business “match fit” to absorb the next big shock. Essential to focus on:

  • Better equipped back-up offices.
  • Technology to productively and quickly allow people to work from home.
  • Flexible working arrangements to keep costs down.
  • More diversified supply chain due to bio-security risk, especially out of China.
  • Greater liquidity and extended credit lines.
  • Longer-term funding and reduced leverage.
  • Service company level of on-line capability and the digital platform accompanying it.

We have entered a new paradigm whilst dealing with three major structural changes well before COVID-19, namely debt, deleveraging and demographics.

Debt and Deleveraging
Older populations need to deleverage as they head into retirement given our personal debt levels. Australian’s have the second largest level of household debt in the world, at around 120% of GDP. The debt burden has trebled over the past 30 years. High housing debt levels and servicing issues mean less spending is available for consumption of goods and services. Furthermore, young Australians are coming out of universities with a much larger debt than their parents and they are having to borrow excessive amounts of money to get into one of the most expensive housing markets in the world relative to incomes. This is also against a backdrop where real incomes are actually falling.

World population growth is expected to continue to slow and age. Developed countries, including Australia, continue to suffer from low fertility rates and an ageing population. In Australia, 23% of the population is now aged between 55 and 74.  This transition to a slower growing, older population places downward pressure on economic growth (due to falling consumption patterns) and the natural rate of unemployment. Demographic changes affect business cycles and the monetary policy transmission mechanism. An older population leads to a lowering of consumption and an increase in savings, all of which are meaningfully contributing to deflation. While Australia’s immigration policy as given us one of the highest population growth rates in the OECD, this is set to change in a post-COVID-19 world.