Flat White

Coronavirus: we’ve barely scratched the surface of the economic contagion

13 January 2021

5:39 AM

13 January 2021

5:39 AM

Normally, I strut into a New Year full of motivation, inspiration and sass. Much like an underfed clothes horse down a Chanel runway. But this year, I’m a touch diffident — not scared or deterred –- just a little more cautious. Unemployment is lower than expected, a vaccine will shortly roll out in Australia, and the punters are spending like Aristotle Onassis. The glass tells me it is half full. 

Certainly, compared to how things were looking last March, our health and economy are in better shape than we could have imagined. At a federal level, the Liberal government went full baller with JobKeeperJobSeekerHomeBuild and all manner of cash splashing to soften the blow. The Federal budget read less like an economic strategy and more like the lyrics from A$AP Rocky’s Fashion Killa. At a state level, the premiers engaged in various degrees of sharkjumping, bedwetting and poochscrewingbut as the year came to a close, we saw Gladys go to the top of the class while the others continued to sleep with the lights on.  

As a Sandgroper, a particular highlight was watching Mark McGowan and Roger Cook try to school Gladys about managing a cluster when they couldn’t manage to keep the borders open for 10 days without losing their nerve and being exposed for having no plan and no clue. A close second was watching Crown Perth turn into Bali on the Swan.  

Overall, we are relatively unscathed compared to elsewhere in the world. But I have a niggle that the battle is only half won. 

As the calendar clicked over into the new yearthe insolvency temporary measures expired, as did time to apply for early access to superannuationProspectively, JobKeeper will finish up in March, as will moratoriums on evictions in many states.  

Our cushion is fast turning into a church pew. 

From a business perspective, we have seen relatively few insolvencies despite the tumultuous economic conditions. Between January and October 2020, 4175 companies entered into external administration compared to 6962 for the same period the year before. That is a 40% drop during a time of significant economic upheaval, so there is likely to be a spike in insolvencies just to level up with a *cough* normal year. Then there will be a procession of COVID19 related corporate casualties which will likely be felt hardest by Victoria in a geographical sense and by tourism, hospitality and retail in an industry senseThe severity (or lack of it) is one of those things which will come out in the wash but it’s a commercial reality we need to be mindful of. 

The burning question is: can we stimulate enough demand, quickly enough, to generate sufficient revenue for business, to repair the damage that has been done?  

Well, that depends on the industry, the relevant state government and the existing fundamentals of the business. As at March 2020, there was already a sense that the economy was running out of puff and that cheap debt funding was keeping many businesses on life support and scraping by. Chances are many of those business are unlikely to survive despite having had a ‘get out of jail free’ card for the best part of 2020. The future also looks dim for businesses which rely on international tourism, international education or where restrictions on trade have been ongoing or closely intermittent. They have had the demand that underpins their business greatly restricted and this makes trading out of the red almost impossible.   

The other, less tangible, issue is the contagion of illiquidity on other businesses and the knock-on effect to unemployment. It is not uncommon for one insolvent business to drag others down with it when it enters into external administration: the ripple effect of can be broad and can often subsequently affect consumer and business confidence.  

Some of the potential corporate carnage will be ameliorated by a heavy supplyside federal budget, an imminent vaccine rollout, leeway from the banks and reforms to the Corporations Act which allow small businesses to utilize a simplified restructure and liquidation process. These new corporations law provisions will help some small business restructure and survive or otherwise help deliver more value to creditors in a liquidation.  

However, for businesses to recover organically, they need demand, certainty and consistency. The slower these fundamentals are to return, the longer it will take for the economy overall to recover. That is, people will have more confidence to spend and make plans in an environment with reduced level of fear and with clear and reliable virus management.  

At the heart of the uncertainty is the hokey-pokey state governments are playing with lockdowns and interstate borders. As I’ve already mentioned, NSW has shown that you can manage the risk of outbreaks by effective policy and administration without taking draconian measures which scare people and pull the rug out from under business. Most other premiers are using lockdowns and border restrictions as political playthings and as an alternative to actual competent governance. This may be great for parochialism but it leaves businesses firmly in the dark and searching desperately for a light at the end of the tunnel. 

So, in 2021, we need to do better. We need a measured and consistent approach to health and the economy so we can do more than just half win this battle.  

Because fear and uncertainty are bad for our actual health as well as our economic health. 

And we need both to recover so we can prosper 

Caroline Di Russo is a lawyer, businesswomen and unrepentant nerd.

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