I am Leon Gettler. My job is to review and monitor the week’s news in business, finance, and economics. I bring it all to you, every week.
This is episode number six in our series for 2020 and today’s date is Friday, March 13.
First I talk to Tiffani Bova, Global Customer Growth and Innovation Evangelist at Salesforce
And then I’ll be talking to economist Nicholas Gruen about creating citizens’ assemblies
But first, let’s talk to Tiffani Bova
Australia’s economy will record its first recession since 1991 as the hit from China’s virus-induced slowdown is amplified by slumping confidence and domestic disruptions from the outbreak intensifying Down Under, according to Bloomberg Economics’s James McIntyre.
And S&P Global Ratings says Australia’s ratings are not under immediate threat despite saying a recession was like ‘likely’. In June, Gross domestic product will fall 0.4 percentage points in the first three months of the year and 0.3 percentage points in the second quarter, ending a 28-1/2-year stretch of economic growth, McIntyre said in a report Monday. “Isolations and domestic disruptions to contain the spread of the virus will have a mounting economic impact, which is likely to result in a further GDP contraction in 2Q and potentially beyond,” McIntyre said. “Stimulus, both fiscal and monetary, will help to reduce the damage, but is unlikely to be enough to offset the impacts.”
GDP will expand by just 0.4% in 2020, he forecasts, some 1.5 percentage points below his pre-coronavirus estimate. McIntyre predicts large budget deficits ahead as the automatic stabilizers — increased welfare payments and reduced tax collection — begin to take hold. That’s on top of the fiscal stimulus needed to boost demand and confidence.
The ASX was sent crashing below 6000 with losses of more than $140 billion in one day, the lowest level since October 2008, and the Japanese Yen jumped to the strongest level since 2016 in the start of another roller-coaster week, but this time with an oil-price war to add to the distress.
Russia’s refusal to meet OPEC’s push for production cuts unleashed a 10% fall in the price of crude and threatens to revive the energy wars as the coronavirus’ global spread inflicts mounting damage on commodity and equity markets. It’s the biggest fall in the oil price since the GFC. Crude oil prices crashed and U.S. equity futures plunged at the open Monday in Asia, while the yen and sovereign bonds jumped, as a price war for crude threatened an already fragile global economy hit by increasing coronavirus worries.
Brent opened 20% lower. S&P 500 futures were down well over 3%. Equities in the Middle East plunged on Sunday as Saudi Arabia slashed the price of its crude after producers failed to agree on supply cuts. Global markets had another rocky week with sentiment battered as the virus continues to spread and cause more disruption to economies.
The oil-price war comes as U.S. stocks fell back into a correction and Treasury yields slumped to all-time lows. Meantime, expectations are growing for a recession in some major economies. Pacific Investment Management Co.’s Joachim Fels said the U.S. and Europe face the “distinct possibility” of a technical recession in the first half of this year as the virus hammers demand and drive money into safe-haven assets. The collapse in oil prices will put extra pressure on the economies of all the major oil companies and producers – the price is rapidly sinking below the break-even points for all the big oil-producing nations – while also unsettling and destabilising the high-yield, or junk bond, market in the US. Energy companies account for more than 10% of that market. If prices remain at or below the current levels for any length of time there is potential for a wave of bankruptcies in the US energy sector, while economic woes and social unrest in countries like Iran, Iraq, Venezuela, and Angola would intensify.
A coronavirus-driven Australian slowdown may trigger unconventional monetary policy as soon as the middle of the year, according to market participants readying for QE. The Reserve Bank of Australia may kick-start a bond-buying program in a few months to buoy a battered economy, said AMP Capital Investors. Meanwhile, Kapstream Capital, BlackRock. And Nikko Asset Management Ltd. is among funds that have been purchasing bonds in anticipation of further interest-rate cuts and the arrival of quantitative easing.
Coronavirus is set to test the nascent pandemic bond market, as the virus triggers the insurance mechanism resulting in investors losing their principal investments, says international rating agency DBRS Morningstar. Marcos Alvarez, a UK-based analyst with DBRS Morningstar, said $US320 million ($484 million) was tied up in pandemic bonds globally and it was likely that much of this would be lost as the disease spreads. He said this would test the popularity of the investment vehicle, which has only been around since 2017 and has never yet been tested. Pandemic bonds are a type of catastrophe bond, or insurance-linked security – an investment vehicle issued by insurance companies, financial institutions, and governments – to protect against the costs of a sudden pandemic outbreak.
Investors receive a higher-than-average coupon in compensation for the risk that they will lose some or all of their principal in the case of a pandemic. While most catastrophe bonds cover natural disasters such as hurricanes, cyclones, and earthquakes, and are issued by insurers and reinsurers, the only issuer of pandemic catastrophe bonds is the International Bank for Reconstruction and Development, part of the World Bank. The market was launched in 2017 following the ebola outbreak in West Africa in 2014 as a way of transferring some of the cost of international aid from the coffers of the World Bank on to capital markets. The high-coupon securities immediately proved popular with investors, and the $370 million issuances in 2017 were 200% oversubscribed. Mr. Alvarez said it was now highly likely that the catastrophe bonds would be triggered for the first time.
Australia’s businesses are turning more pessimistic on the fallout from the coronavirus, with sentiment gauges falling and suggesting further deterioration ahead. The National Australia Bank gauge of business sentiment slid to -4 in February from -1, the weakest reading since July 2013, where businesses were battling heightened domestic political uncertainty and the winding down of the mining investment boom. The conditions index — which measures hiring, sales and profits — dropped to zero from a downwardly revised 2.
The ANZ Roy Morgan Consumer Confidence Index fell 4.2% last week. This was the third consecutive fall, for a cumulative decline of more than 8%, taking the index to a low last seen in May 2014. Current economic conditions’ fell 8% adding to the massive 16.6% decline in the previous reading.
The Westpac-Melbourne Institute Index of Consumer Sentiment fell 3.8% to 91.9 in March from 95.5 in February. The worsening coronavirus outbreak and the associated rout in financial markets have had a major impact on sentiment this month. The Index has hit a five year low. In fact, it is the second-lowest level of the Index since the Global Financial Crisis when the Index bottomed out at 79, (with an average read of 86.8 over the period).
Scott Morrison has urged big businesses to display “patriotism” as Australia grapples with the coronavirus crisis, which he warns could hit the economy harder than the global financial crisis. Addressing a business audience in the run-up to this week’s stimulus package, Morrison will say large companies have “a huge role to play”, telling them to hang onto staff, and support workers including casuals with paid leave when they need time off because of the virus. They should also pay small business suppliers ahead of time in the coming months.
The Morrison government’s coronavirus rescue operation means the PM’s promised budget surplus is now very unlikely and the government will break its self-imposed $600 billion debt ceiling. The stimulus package, which is tipped to cost between $5 billion and $10 billion, contains tax relief, wage subsidies and cash payments to help business and cash bonuses for welfare recipients to stimulate consumption. This is in addition to the Morrison government dedicating almost $2 billion more for health services as well as a $30 million information campaign to try to stem the panic.
Commonwealth Bank said it was ready to cut fees and defer repayments for small business borrowers struggling with cash flow amid the coronavirus outbreak, ahead of a meeting between bank CEOs and Treasurer Josh Frydenberg on Wednesday in Sydney. CBA said if the coronavirus keeps customers away and small businesses start to struggle, it is willing to push back repayments on loans and overdrafts for three months, waive fees for use of its payment terminals for three months, and will move more of its own suppliers onto immediate payment terms.
Flight Centre employees are being asked to drastically cut back their working hours or take unpaid leave as executives scramble to offset the devastating financial impact of COVID-19. In an internal email sent to the company’s 10,000 employees, staff members were asked to reduce their workload by one day a week to alleviate the “significant” downturn caused by the outbreak.
“Staff can work a four-day week rather than five days with their salary reflective of this change,” the email said. “All staff have been offered the opportunity to reduce their FTE (full-time equivalent) by one day per week or fortnight.” In the email, the company conceded the impact of the deadly virus had been “significant” and said if employees heeded the appeal to cut back on hours it would “make a big difference”.
The travel agency’s contingency plan was activated on Wednesday. All eligible employees have been asked to book and take a minimum of one week’s annual leave before June 30, and optional unpaid leave is also available. The move comes as global air travel is increasingly grinding to a halt, forcing the travel industry to reckon with the mounting cost of canceled flights, lost sales and substantial reductions in services. And like the rest of the tourism industry, the rapid spread of the virus has rattled Flight Centre and led to a sustained collapse in bookings to China and the rest of Asia, including Hong Kong, Japan, and South Korea. Last month, Qantas outlined its plans to ask staff to take paid leave owed to them and freeze recruitment as it slashed services in response to the COVID-19 crisis.
Air New Zealand has scrapped its earnings guidance for the full year 2020, citing the increased uncertainty surrounding the duration and scale of the coronavirus outbreak. The airline said it had taken numerous steps to mitigate the impact of the reduced demand but now believed the financial impact was likely to be more significant than it had previously estimated. It added that the situation was evolving at such a rapid pace, the airline was currently not in a position to provide an earnings outlook to the market. Across its network, Air New Zealand has reduced capacity by 10%. Asia capacity has been reduced by 26% Tasman capacity is down 7%, Pacific Islands are down 6% and its domestic network has been reduced by 4%, with a 10 to 15% reduction set to take place in March and April.
At the same time, the short-term outlook for passenger airlines like Qantas and Virgin Australia has been slashed to negative at Moody’s Investors Service as analysts tally up the costs of the COVID-19 outbreak. Plus the International Air Transport Association last week said the outbreak would erase up to $US113 billion ($171 billion) in revenue in the aviation sector this year. The agency cited pressures associated with the uncertain duration and spread of the coronavirus strain on airline profits to justify the decision; it does not forecast a recovery any sooner than the third quarter of 2020.
Qantas chief executive Alan Joyce increased Qantas’ capacity cuts from 5% to 23%, delayed new routes, shelved a $150 million share buyback and abandoned its financial guidance due to the unfolding crisis. The capacity cuts will mean Qantas needs 2,000 fewer staff; Joyce will ask staff to take paid leave and then unpaid leave in a bid to avoid redundancies. To his credit, Joyce and chairman Richard Goyder will make this request having announced they will take no salary for the last three months of the year. Senior executives and the rest of the board will take a 30% pay cut.
The worldwide spread of the novel coronavirus is leading to some curious side effects: Store shelves are being stripped bare from Singapore to Seattle. Supermarkets in the U.K. have started rationing items. In Hong Kong, a delivery man was reportedly robbed at knife-point of hundreds of toilet paper rolls.
Australia has seen brawls break out at supermarkets prompting police to taser one man. And France effectively nationalized all production of face masks after people began depleting the supply. Panic buying has emerged as reliable a feature of the coronavirus epidemic as a fever or dry cough.
Psychologists view control as a fundamental human need. With a disease that’s highly infectious and can turn deadly, this epidemic violates a sense of control in fundamental ways. Unless policymakers can find a way to restore that feeling, the cycle of panic buying, hoarding and scarcity only stand to escalate. The panic buying is already threatening to do real damage. The U.S. Surgeon General has pleaded with Americans to stop buying face masks to ensure that health care workers have them, while Japan has said it will introduce penalties for reselling masks. EBay Inc. banned new listings for health products after instances of price gouging became common, with packs of hand sanitizer that usually sell for $10 popping up for $400.
The administrators of George Calombaris’ restaurant empire are recommending the companies be liquidated, with some new food venues set to open in their wake. Advisory and investment firm KordaMentha says it has sold Jimmy Grants in Fitzroy and Hellenic Republic Brunswick and is finalising the sale of Hellenic Republic Brighton, Hellenic Republic Kew and Jimmy Grants Emporium. It has negotiated a sale of assets to landlords. For most of the company’s other establishments – the Hellenic Hotel in Williamstown and Jimmy Grants in Ormond, Richmond and St Kilda – its assets on site will be sold off in an online auction conducted by Hymans.
The main items of value are alcohol inventories, with perishables already given to a food rescue charity. It wasn’t feasible to collect the alcohol at Jimmy Grants in Chadstone. Post-liquidation, KordaMentha doesn’t expect the group to have the $1.34 million it estimates it owes employees, including $368,336 in unpaid annual leave and $900,496 in termination entitlements.
Another major Australian retail chain has collapsed, with the receiver warning that more could follow, as consumer confidence remains shaky. Almost 500 jobs are in limbo after Melbourne-based stationery chain kikki.K was placed into voluntary administration. The chain has 65 stores across Australia, Singapore, Hong Kong, London and New Zealand, as well as an online store. Administrator Cor Cordis plans to keep stores open and sell the whole group The chief executive said the company had been caught in a perfect storm of soft consumer demand, bushfires and coronavirus At least six other retailers, including Bardot, have also gone under or been forced to close stores this year
And that’s it for this week. And next week, I’ll be talking to Brendan McKeegan from Australian Plant Proteins, which has secured funding to commence the fit-out of a manufacturing facility of a pulse-based extract in Horsham, Victoria. And I’ll be talking to IFM chief economist about the outlook for the Australian economy.
In the meantime, you can find me on Twitter at talkingbizz, on Facebook, and on LinkedIn. And if you want, leave a comment. Wishing you all a terrific week, and looking forward to bringing you Talking Business next week.