Every day a commentator conjures another letter to explain what Australia’s economic recovery will look like – a ‘U shape’, a ‘V shape’, an ‘L shaped’ recovery. Today, I will offer my two penneth on this topic. But before I do, let’s consider what Donald Rumsfeld once described as the ‘Known Knowns’, the ‘Known Unknowns’ and the ‘Unknown Unknowns’.
There is much which we Know, but three items warrant particular attention.
First, tens of thousands of Australian businesses now rely upon one of more (or perhaps all) of the following support:
- JobKeeper payments of $1,500 per fortnight, per employee
- $100k cash boosts from the ATO
- Waiver of payroll taxes and other State government levies
- Rent reductions of up to 25% and deferrals of another 25%.
- A moratorium on eviction for not paying rent
- A moratorium on repayments to banks
- A moratorium on unsecured creditors winding up debtors.
- A moratorium on insolvent trading risks for directors
This support is currently scheduled to be withdrawn at 30 September.
Many Australian businesses are ‘zombie’ businesses – that is they have just enough capital to continue to operate, but insufficient capital reserves to grow or deal with an economic shock, such as the withdrawal of this support. Without some or all of that support, they will go out of business. Many of these businesses are the small businesses who employ 44% of our workforce.
Secondly, for the first time in a century, most of our workforce rely on Government support. For these purposes, the Roy Morgan data is more relevant than the lagging ABS data which does not count those who have recently left the workforce.
Of a national workforce of ~14.3m:
- 2.4m (17%) are unemployed
- 1.52m (11%) are under employed
- 44% (~6.3m people) are supported by JobKeeper.
JobKeeper, and the 100% unemployment supplement for JobSeeker, are currently scheduled to be withdrawn at 30 September.
Finally, our borders are indefinitely closed for international travel.
These are facts – the Known Knowns.
There are three key risks facing the Australian economy- domestic consumption, migration and global impacts. They are Known risks. Their impact is Unknown.
We know that the current business policy support is scheduled to end. We also know that it would be an unmitigated economic calamity if all of that support was withdrawn simultaneously at 30 September, with no other support measures.
Our Governments (State and Federal, Coalition and Labour), public officials and institutions have to date handled the crisis pretty well. I am content to assume that they will continue to manage it pretty well.
Which leads me to assume that we will see policies which will ‘taper’ the withdrawal of this support – perhaps by tightening the JobKeeper qualifying tests and allowing the broader suite of supports to continue to apply to those who qualify under that stricter test for say another six months. That tapering will ensure that we do not have an unmitigated economic calamity. It will instead be a mitigated economic calamity.
Despite this tapering, unemployment, underemployment and business failures will be higher than we have seen for over a generation. This will erode the ability and the willingness of consumers to spend. Recent surveys indicate that only 15% of people intend to go back to their pre-COVID spending habits. After the GFC, savings rates increased from 2% to 10%. We can expect these trends to repeat. This will drag on domestic consumption which accounts for 60% of our economy. It is not difficult to see domestic consumption reducing by 5%. That alone, would reduce GDP by 3%.
Bans on international travel, amongst other things, will reduce migration which is forecast to fall by 30% in 2020 and 85% in 2021!!! The Australian population could decline for the first time since the Depression.
For the last generation, economic growth in Australia has largely been driven by a rising population. Half of that population growth has come from net overseas migration, rather than natural increase. Other than the fact that most migrants tend to be economically active (ie they are of working, rather than schooling or retirement age), every new migrant needs and consumes a house, appliances, schools etc. They are overwhelmingly net contributors to economic growth and prosperity.
A collapse in migration causes housing development/construction to fall. Anecdotally, those close to the building industry tell me they are bracing for a 50% decline in housing starts from FY2021. The housing industry contributes ~$150b (~8%) to Australia’s economy, employing over 1 million people. If it falls by 50%, there goes another 4% of GDP!
There are a range of Known off shore risks which could materially impact our economy:
- Health. If other countries don’t get COVID under control, we may face second or third waves of infection in Australia.
- Global economy. The domestic economies of Europe, North America and other jurisdictions are likely to be more severely affected than ours.
- Trade wars. Global trade may be further interrupted by trade wars between China and the US
- China. Our largest export market (~30% of all of our exports) is being increasingly belligerent toward Australia and threatens to boycott our exports such as barley.
These are the obvious Known risks, but their impact is Unknown. Unfortunately, whatever their impact, I can only see it being to add downside, rather than upside, risk to our economy.
One final Known is that enormous efforts are being directed at finding a vaccine and an antidote for COVID. A mass produced vaccine would completely change this risk profile. It would provide a sudden change in consumer and business confidence globally and with it, an enormous surge in economic activity which could kick start a more rapid global economic revival. However, we still don’t have a cure for the common cold, so it would be brave CEO who built her business strategy on the assumption that a vaccine would be discovered, tested, mass produced and distributed to the world’s population by say 30 June 2021!
The greatest Unknown Unknown is how our financial markets deal with this extraordinary shuffle and destruction of capital? But that is a question for the next topic when we will explore the financial impact of COVID.
Which all brings me back to the original question – what will the recovery look like? I have scoured our alphabet and cannot find a letter which depicts the path which I foresee. I don’t see a sudden recovery in the economy – either in the short term (as suggested by a ‘V shape’) or medium term (as suggested by a ‘U shape’). Nor do I see the hyper pessimistic ‘L shape’, in which there is no recovery for a very long time.
Unfortunately, I foresee no letters, but rather a long shallow staircase. And it is a staircase which we will all have to climb, step by slow step, for three to five years, before we return to anything like the prosperity we enjoyed only a few short months ago.
Despite all of this gloom and doom, there is a positive! We have (relative to much of the rest of the world) a strong economic base from which to build. We have proven and stable institutions. And most importantly, we have a population which time and again in its short modern history, has proven itself resilient, hardworking and innovative. All of which means that, whilst it will be a long slow climb out, our staircase is solid – and if we keep our heads down and do what needs to be done, we should be able to climb out without slipping or falling.