This is episode number thirteen in our series for 2020 and today’s date is Friday, May 1.
First I talk to Andreas Dzumla, the founder of Longtail UX which managed to secure $5 million of funding when so many Australian businesses are struggling with the impact of COVID-19. How did he do it?
And then I’ll be talking to Rabobank economist Michael Every about how China’s economy is coping with the global recession and whether it will recover.
But first, let’s talk to Andreas Dzumla.
The coronavirus pandemic will cause the global economy to shrink 4% in 2020, according to a Bloomberg Economics estimate that assumes a recovery starts in the second half of the year. The economy has “entered a downturn of unprecedented speed and severity, with most advanced economies facing their weakest performance since the Great Depression,” Tom Orlik and Jamie Rush wrote in a report. “Relative to expectations at the start of the year, the cost of lost output is more than $6 trillion,” they wrote.
And Moody’s Investors Service expects G-20 advanced economies as a group to contract by 5.8% in 2020. Even with a gradual recovery, 2021 real GDP in most advanced economies is expected to be below pre-coronavirus levels. Excluding China, Moody’s projects G-20 emerging market countries’ growth of -3.5%, down from a forecast of 3.2% before the outbreak. China’s economy is forecasted to grow by 1.0% in 2020.
Another three months – that’s about how long American businesses can handle the brutal coronavirus-triggered economic deep winter freeze. After that, they won’t be reopening, says Wells Fargo acting chief economist Jay Bryson. “The sudden stop in economic activity that the COVID-19 pandemic has caused means that many businesses will need to rely on their cash reserves to survive the next few months,” Mr. Bryson wrote on Monday. “If businesses can forgo profits temporarily and do not need to purchase most inputs, then we estimate that the overall business sector could hold on for roughly four more months.” That puts them on a timeline to oblivion by July, counting the five or six weeks of the shutdown that has already taken place. American capitalism doesn’t envisage a system in which companies operate without profits or buying inputs, and neither is that true in any other market economy. But the question is acute in the US given its status as the world’s biggest economy.
Fancy a shopping trip with friends, to try on a few clothes, browse for a gift, linger in a bookstore? Those plans might be on ice for a long while yet if guidance from the British retail industry is anything to go by. In a set of post-lockdown guidelines for non-food shops, Britain’s retail industry body and the main retail trade union have painted a picture of shopping that makes it look a lot more functional than fun.
Here’s what your visit may look like, according to the British Retail Consortium and the Usdaw union. First, the maximum number of people will be allowed in the shop at any time, so you’ll start your visit by queueing outside, at a distance of 2m from everyone else. When you get in, a shop assistant or security guard will be greeting customers with a smiling but stern reminder to keep your distance while inside. They might point out the one-way system around the aisles. You’ll see staff regularly wiping door handles, lift buttons, handrails. You might be given hand sanitiser or towels to wipe down your own trolley or basket. You might be tired from the queue, but seating will have been removed or reduced, to discourage loitering. Toilets? Possibly, but only on request.
Want to try on that pair of jeans? No – the change rooms are closed. Maybe test that pair of headphones? Possibly not, or only with copious amounts of sanitiser. A visit to the cosmetics counter? No, that’s out too. At the till it’s card-only payments where possible. The cashier will be behind a sheet of plexiglass. The shop staff might be wearing masks and will disappear regularly for handwashing breaks. It’s clear the shopping experience won’t be quite what it was before. Small wonder, then, that in a country which already has one of the highest penetration rates for online shopping, there are question marks over whether bricks-and-mortar shops will ever really recover from COVID-19.
According to Bloomberg Economics, Australia appears to have succeeded in flattening the coronavirus curve, but such an optimistic health outcome won’t prevent the economy from experiencing a deep downturn. Our base case anticipates the largest contraction since the 1930-1931 Great Depression. Significant stimulus — both monetary and fiscal — is cushioning households and helping businesses to survive and retain workers.
Despite this, Australia’s small open economy has already seen considerable damage and faces headwinds from subdued global demand and trade. Significant monetary-fiscal coordination to provide further stimulus will be required to recover the economy over the years ahead. Bloomberg anticipated three consecutive quarters of declining gross domestic product, with Australia’s economy contracting by 9% from 4Q 2019 before a gradual recovery begins in 4Q 2020. We do not expect a recovery to the pre-outbreak level of activity until 2H 2022. For 2020, its base case estimate remains a 6% contraction, unchanged from our previous projection. The better than expected virus containment would boost 2021 growth from 1.6% to 2.5%. A potential second wave of the outbreak remains the main downside risk. The overnight cash rate is expected to remain on hold through at least 2022, with ongoing quantitative easing to contain yields amid rising issuance as fiscal packages and automatic stabilizers kick in.
A rise of 0.3% in the March 2020 quarter Consumer Price Index (CPI) reflected the impact of drought and bushfires on some food prices and the early effects of COVID-19, according to the latest Australian Bureau of Statistics (ABS) figures.
Treasury deputy secretary Jenny Wilkinson told a Senate committee 540,000 businesses covering 3.3 million workers have registered for the JobKeeper scheme. It was also revealed 757,000 of the 762,000 applications for early access to superannuation have been approved, with payouts totaling $6.3 billion. More than $4.5 billion has been paid out to businesses a week earlier than scheduled. Treasurer Josh Frydenberg and Finance Minister Mathias Cormann will provide economic updates to parliament on May 12 to outline the government’s $320 billion in coronavirus measures. Senator Cormann, says some jobs will never return after the coronavirus pandemic but new kinds of jobs and businesses will emerge from the crisis. Treasury Secretary Steven Kennedy, giving evidence to the Senate select committee on the government’s COVID-19 response, said the final shape of the economic shock coming for Australia will depend on how widely the deadly virus is transmitted here and overseas. But he said some jobs and businesses will have been lost permanently.
The coronavirus shutdown has had an immense impact on Australian hotel room bookings, according to research from the hotel analysts STR. More than 240,000 hotel rooms around the nation are uninhabited — either shut or vacant — and some 300 hotels have closed their doors. Of those that remain open, occupancy rates sit at just 20%. Western Australia’s hotels have maintained the highest rates of occupancy, sitting at 30%. Hotel owners say the biggest challenge in staying afloat during the downturn is the “lack of certainty”.
Australian businesses have warned the national economy could take a $400 billion hit if coronavirus restrictions are kept in place for six months. Modeling by the Business Council of Australia shows the economy could shrink by more than 20% this year. But if a rapid “V-shaped” approach to recovery is taken, the economy could contract by as little as $197.3 billion. The business lobby group is campaigning for an early easing of trading restrictions to get the economy going again. It’s also pushing for changes to company taxes and industrial relations laws. Industry Super Australia, the lobby group representing 15 big funds with a combined $412 billion in funds under management, fears the total savings drawdown could double the government’s $27 billion forecasts.
Younger workers who have been laid off or had their hours reduced appear to be completely draining their superannuation savings, according to average drawdown data for the first week of the government’s early access scheme. The figures came as Treasury confirmed a decision to allow temporary visa holders to draw down their savings is expected to see a further 700,000 fund members drain an extra $2.5 billion out of the $3 trillion retirement income system. This would take the government’s estimate of take-up of the access scheme to 2.3 million members unlocking a total of $29.5 billion by the end of September, up from an initial estimate of 1.6 million members raiding $27 billion.
The frugal habits formed by housebound Australian consumers amid the coronavirus pandemic could have a lasting impact on the way we save and spend in the coming years, according to a data analytics firm owned by Accenture. The firm has seen a surge in spending on gambling sites, alcohol, video games, pet grooming services, and music and television streaming services. Consumers have abandoned spending on clothing retailers, fitness centres, beauty and nail salons, and dentists, and most consumers don’t plan to “return to their old spending habits.”
Prime Minister Scott Morrison has shelved talk of a six-month economic “hibernation” and is nudging the states to allow more businesses to reopen before an official review of restrictions in less than three weeks. Queensland and Western Australia on Sunday responded to weeks of low infection rates by taking their first steps to unwind strict social distancing rules, including for local travel and social gatherings. In a boost to real estate activity, WA will allow 10 people to attend open home inspections. The moves indicate the battered economy is poised to reopen faster than planned. The government is leaving open the option of an early wind-back of the $130 billion JobKeeper wage subsidies for some businesses that return to more normal trading conditions.
National Australia Bank has released its half-year results 11 days before schedule, cutting the interim dividend to 30 cents per share and unveiling a $3 billion placement to bolster capital ahead of an expected spike in credit losses. The bank reported a 51% slump in half-year profit to $1.3 billion. The single biggest factor in that decline was an almost $1.2 billion increase in the money the bank set aside to cover future losses from bad debts, with more than $800 million directly related to COVID-19 effects. There was a further $1 billion in write-downs to a change in the way the bank accounts for the cost of its software. However, the results for the half-year ending on March 31 are yet to reflect the full fallout from COVID-19 and the shutdowns and social distancing that have crippled large sections of the Australian economy.
NAB’s underwritten, $3 billion institutional placement will be accompanied by a share purchase plan to raise a further $500 million, as the bank “seeks to provide a buffer to assist with credit losses” and soaring risk that could result from “a severe and prolonged downturn,” the bank said in presentation slides released in a flurry of surprise ASX announcements on Monday morning. “In light of the uncertain economic outlook due to the COVID-19 pandemic, we are taking proactive steps to build capital via an equity raising and a reduction in the interim dividend,” said NAB chairman Philip Chronican and group CEO Ross McEwan in a joint letter to shareholders. Cash earnings have fallen 24% to $2.4 billion for the half. NAB will pay a 30¢ interim dividend, fully franked, reflecting a payout ratio of 35% a cut of 64% on the 83¢ interim dividend paid at the half-year in 2019.
Westpac has revealed the bank will take an additional $1.6 billion hit in the first half ahead of interim results next week as it braces for the impact of the COVID-19 economic fallout. The bank says the impairment charge is related to significant changes to key forecasts in the wake of the virus crisis, a deteriorating worst-case scenario, and an additional industry-by-industry overlay of additional stress that may emerge in the months ahead. The bank flagged a total of $2.2 billion in provisions for the half with another $600 million of non-COVID-19 related provisions. These charges are in addition to the $1.43 billion in charges the bank announced two weeks ago which included setting aside $900 million for the AUSTRAC matter.
Aristocrat Leisure has suspended its interim dividend after reporting almost all its land-based customers globally have suspended operations since mid-March. Its land-based operations account for approximately 60% of total revenue while 40% comes from its digital business. The company said in response it had undertaken a range of cost reduction initiatives. Roughly 1000 staff will be stood down until the end of June 2020 and 200 roles permanently removed from the business. 200 full times roles will move to part-time until the end of September and cuts of 10 to 20% will be applied to the base salaries of 1500 staff. Fees paid to directors will be reduced by 20% and managing director Trevor Croker will reduce his salary by 30%.
Australia’s fitness industry contends it should be one of the first sectors to reopen as retail restrictions around the coronavirus pandemic are loosened, Industry representatives say that if masks are worn, air conditioning is turned off to allow fresh air to circulate, and equipment is cleaned regularly, gyms can follow appropriate social guidelines. Epidemiology experts are more cautious, though, arguing fitness centres will likely remain unsafe in the short term, “even with hygiene and distancing rules.” Gyms have been closed since March 23.
Airbnb has announced new protocols for cleaning and sanitising its listed properties in an effort to reassure travelers and revive bookings for the home-sharing platform, which is reeling from the coronavirus pandemic. The initiative, set to launch in May, calls for “enhanced procedures and guidance on how to clean every room in a home,” and a certification program to identify properties meeting the new standards. Airbnb said it was establishing the new safety policy based on guidance from the US Centers for Disease Control and Prevention and other experts in the field, amid signs of an easing of antivirus restrictions in some countries. The new standards will include a 24-hour waiting period between occupancies. Hosts unable to meet the new protocol may instead opt for a “booking buffer” of 72 hours during which time no reservations will be allowed.
Coles’ sales rose a record 12.9% to $9.2 billion in the March quarter as shoppers stocked up on toilet paper, tissues, and other staples and snapped up takeaway liquor amid the coronavirus crisis. Coles’ supermarket sales rose 13.8% to $8.2 billion and same-store sales, which strip out the impact of new stores, rose a record 13.1%. Same-store sales growth fell slightly short of some analysts’ forecasts as restrictions on purchases of toilet paper, tissues, and dozens of staple foods and cleaning products held back sales growth.
One of Australia’s biggest gold miners has warned that extra hours and other changes designed to prevent COVID-19 outbreaks are increasing the risk of mental illness among workers. Northern Star Resources said there had been a huge spike in workers seeking mental health support in Western Australia and predicted the issue would affect companies across the resources-rich state. Bill Beament -led Northern Star said one of its mines recently had more inquiries to emergency assistance providers in a week than in the previous 12 months. Mr. Beament said the impact on costs and productivity of measures aimed at guarding against COVID-19 infections on mine sites was still unfolding
And that’s it for this week. And next week, I’ll be talking to Chief Transparency Officer of TransparentBusiness, Moe Vela over in New York. An expert in remote working, he will provide valuable insight for businesses to help make this transition to remote work. And I’ll be talking to CommSec chief economist Craig James about the market in the week ahead.
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 safe and healthy week and looking forward to bringing you Talking Business next week.