April 14, 2020 05:12:17
So far, so good. Well, all things considered, about as good as can be expected.
The fight to contain the onslaught of coronavirus is bearing results and the economy is responding to the recent stimulus.
The Coalition Government wisely has junked most of its guiding philosophy for the past three decades as the magnitude of the problem with which it is faced has forced it down a radical big-spending avenue in an effort to save jobs and the economy.
And it is working. According to research by consultancy firm AlphaBeta — run by Andrew Charlton, Kevin Rudd’s adviser through the global financial crisis — the stimulus program has already arrested the alarming decline in discretionary spending that rocked the economy during the last week of March.
Spending per person plummeted an incredible 13 per cent below normal levels in that week alone, just before the $750 payments began landing in the bank accounts of 6.8 million Australians.
While hordes of shoppers flocked to supermarkets to stock up on essentials, anything deemed non-essential was shunned, particularly as retailers shut the doors to protect staff. Since the payments landed, however, discretionary spending has jumped 26 per cent.
While travel and entertainment have suffered hugely as the health crisis has gathered moment, some sectors are booming. And not just the obvious ones like supermarket staples.
Online retail and subscription services and food delivery have soared, up more than 60 per cent.
With many people forced to stay indoors, demand for home improvement products has leapt 64 per cent. The clear winner, worryingly, is online gambling with a 67 per cent surge in demand.
No global coordination this time
But what of the future?
Until now, many have clung to hope that the economy will rapidly bounce back, that once COVID-19 is under control, business will re-open, workers will be re-employed and hibernating corporations will suddenly awaken to a surge of demand.
Just like the end of a war, there will be jubilation in the streets and an outpouring of relief. The “bounce back” will be something to behold.
We all live in hope. But it’s better to leave at least one foot grounded. For, despite all the analogies from our politicians, from an economic perspective, this is very different from a war.
Wartime tends to see economies working overtime, desperately trying to produce enough material to continue fighting as labour, often sent to far-flung theatres, is in extremely short supply.
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Right now, the global economy is shutting down. Even before coronavirus took hold, there was an excess of savings over investment and, in Australia at least, an economy threatening to stall.
Rather than a rebuilding frenzy once the virus has passed, the more likely scenario will be a slow return to restart a stalled global economy.
For even if we do come through this crisis in better shape than most, the American economy is facing enormous difficulties as a result of the reluctance by President Donald Trump to act decisively to stop the spread.
Australia is a small and highly trade-exposed economy. A significant downturn in the global economy will hit home.
One of the most concerning aspects of this crisis is the lack of international coordination and co-operation. A decade ago, global leaders united to save the financial and banking system. Now they are at odds with one another.
US likely to weigh on global recovery
Unlike Australia, the UK, Canada, New Zealand and much of Europe, America has chosen so far to not protect its workforce from mass layoffs.
Where most of the developed world has announced payment plans to ensure employees can survive the onslaught of the virus, the US has announced a one-off payment.
American workers are being forced to apply for social security and our equivalent of the dole. And they are applying in numbers, the likes of which have never been seen before.
This chart from US investment bank Morgan Stanley puts the shocking reality into historical context. Compare the 2008 crisis that saw mass unemployment and vast numbers of Americans turfed out of their homes.
Morgan Stanley thinks the worst is yet to come.
“Notably, economic indicators suggest that counts of new claims will likely remain in the seven digits range over the next few weeks,” it said in a note to clients.
“The cumulative number is thus set to rise much further from here as we move through April.”
As America has morphed into the epicentre of the COVID-19 outbreak, the economy, not surprisingly has gone into freefall.
Discretionary retail activity in the final week of March plummeted an incredible 97 per cent. And the death toll in New York and across other large American cities has yet to peak.
Rescue package may not be the end of it
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As successful as our health policies have been so far in limiting the virus onslaught on our soil, the risks remain elevated.
And our economy, inextricably linked as we are to China and the US, will suffer for as long as those countries continue to falter.
As our economy has evolved, most of our employment growth has been in service industries like retail, tourism-related industries and hospitality.
Our universities have become export industries, with a large portion of their income dependent on foreign students, employing around 130,000 workers teaching more than a million domestic students and 430,000 foreign students.
Those industries have been hit the hardest.
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While the Federal Government is hopeful its JobKeeper program will help more than 6 million workers and a big lift in the JobSeeker payments will provide a buffer for those without a job, the payments are finite.
They are destined to last just six months.
Our banks have stepped up with a series of concessions to struggling households and businesses as well, while landlords have been asked to provide relief.
But the banks aren’t forgiving payments or even providing holidays.
They are tacking those unpaid mortgage repayments onto the life of the loan, essentially capitalising those missed payments onto the loan.
That can only go on for so long. At some stage, if employment is slow to recover, those unpaid loans will have to be classified as bad debts and written down.
That goes straight to the bottom line of bank profitability and it begins to put pressure on the Australian property market.
Unemployment is the single biggest threat to our economy.
We are hocked to the eyeballs in debt, mostly to real estate.
Our housing has become among the world’s most expensive.
And that debt, at 200 per cent of national income, has become a serious headache for the Reserve Bank, as it attempts to keep the economy on an even keel.
Even sober analysts like AMP Capital’s Shane Oliver is anticipating a 20 per cent decline in residential property which, on its own, would be enough to create serious problems for our economy.
Add in a US-led downturn and the chances of a V-shaped recovery seem remote.
Six months is a long time to hibernate. There will be businesses that can’t recover and workers who won’t be re-employed. It’s highly likely that the mammoth rescue package put together by the Morrison Government won’t be the last.
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April 14, 2020 05:03:36