Yahoo Finance Coronavirus has delivered a hammer blow to Australia's economy. What happens next?
The coronavirus crisis has delivered a hammer blow to Australia’s economy, costing jobs across the country as restaurants, cafes, airlines and tourist attractions are suddenly deprived of customers and cash due to travel bans, social distancing, office closures and other measures designed to curb the spread of the virus.
Here’s what’s happened this week.
Stock market dives
The extent of damage can be seen on the stock market, which has swung wildly this week.
Despite some extraordinary surges, the trend remained firmly down. Since selling began in earnest a month ago, shares have lost about a third of their value.
Airlines and travel companies have been hit particularly hard, but the pain has been felt across the spectrum. With the market now back to where it was about three years ago, Australians will also suffer from shrinking superannuation nest eggs.
Related: Australia's banks announce coronavirus relief for small businesses
Big Australian companies hit
Qantas has stood down without pay 20,000 of its 30,000 workers, Virgin has made staff take leave without pay, Flight Centre has closed 100 stores, and Australian-listed retailers with overseas operations have shut outlets across Europe and North America.
Even the scandal-ridden but seemingly invulnerable Crown Resorts empire controlled by the billionaire James Packer has been forced to crimp its operations, closing every second poker machine in his Melbourne and Perth money pits despite demands from public health experts that they be shut down entirely.
It’s hard to see how they can remain open at all after the prime minister, Scott Morrison, announced new measures restricting indoor gatherings to one person every 4sq metres on Friday afternoon – creating uncertainty for 18,500 employees.
Uncertainty prevails – this week alone, at least 28 companies listed on the Australian stock exchange have withdrawn their profit forecasts because of the coronavirus outbreak.
Raising fresh money to get through the downturn is now almost impossible and credit markets have also frozen over.
That’s bound to make investors in debt-laden companies such as Seven West Media even more nervous than they already are.
On Friday, travel website Webjet went into a trading halt as it sought an emergency cash injection.
Related: Australian housing market will hit the wall in coronavirus recession, experts say
Small business in crisis
But, despite the sharemarket carnage, it is not among the big companies listed on the ASX that the bulk of the initial pain has fallen.
Dollars have been instantly sucked out of small and medium-sized businesses that rely on face-to-face trade – events, restaurants, cafes and shops.
They have already begun shutting down and sacking people, setting the scene for a housing crisis within weeks as suddenly unemployed workers can’t pay their rent or mortgage instalments.
And more will close after Morrison announced on Friday that indoor gatherings, which have already been cut to 100 people, will be limited to one person per 4 sq metres.
Businesses are also unable to pay commercial rents. Hospitality operators have begun simply telling landlords they won’t get paid this month because the business is closed.
How bad could it get?
Really bad. Economists across the board now predict a recession – it’s just a question of how long it goes for and how deep it is.
Investment bank UBS has done detailed economic modelling of the effects of the virus, looking at what happens in a moderate, intermediate and severe outbreak.
They have now discarded the moderate scenario, where infections peak next month, as too optimistic.
In the intermediate scenario, which is the best that can now be hoped for, virus infections peak in June, and the economy begins to recover. Even so, economic growth is just 0.5% for the year, house prices drop 5% and airline traffic returns to normal by next July.
The severe scenario sees infections peak in September. The economy goes backwards for the entire year, shrinking by 0.4%. House prices crash by up to 20% and airline traffic isn’t back to normal for another year or two.
People under 30 have never lived through a recession in Australia and won’t understand how hard times will be. Jobs will be scarce and wages, which are already stagnant, will remain static or go backwards.
Ratings agency S&P says the entire Asia-Pacific area is guaranteed to go into recession, with Australia particularly vulnerable because so many of us work casual shifts or part time.
“While this gives employers flexibility in reducing hours, the impact on workers can be brutally swift,” S&P’s chief economist, Shaun Roache, said.
“In turn, this will hit consumer confidence and household income and spending.”
Related: Emergency stimulus explained: what the RBA and government are doing to boost Australia's economy
What is the government doing about it?
The heavy lifting so far has been done by the Reserve Bank, which has flooded the economic system with money.
This week it made the highly unusual decision to break from its usual cycle of monthly board meetings and cut official interest rates to just 0.25%. Because the RBA buys and sells money in a band around the official rate number, this means interest rates are effectively already zero.
It will loan the banks up to $90bn at an interest rate of just 0.25%, on the condition they in turn lend the money to small and medium-sized businesses.
On top of that, it will buy government bonds from banks to inject yet more cash into the banks.
The process, called “quantitative easing”, was used by central banks during the global financial crisis. It is effectively the same as printing money because the RBA pays for the bonds by increasing the balances of the accounts the banks hold with it.
They “simply use the computer to mark up the size of the account”, as the former US Federal Reserve chairman Ben Bernanke once said.
This means the RBA has an unlimited supply of cash and the only practical constraint on how much money it can pump into the system is inflation.
Putting too much in would eventually make money worth less, causing prices to rise. But as inflation remains stuck lower than the RBA’s target of 2% to 3%, it’s not likely to worry the Reserve Bank chairman, Philip Lowe, any time soon.
“Nothing is off the table,” he said on Thursday. “We’re in extraordinary times and we’re prepared to do whatever is necessary.”
What happens next?
Older readers may remember that last week Morrison delivered a $23bn stimulus package, aimed largely at small business.
It was a gamble that has now clearly failed. Morrison and the treasurer, Josh Frydenberg, have returned to the drawing board and are expected to emerge with a second try as soon as Sunday.
For business, it is now clear the emphasis on tax concessions in version one won’t cut it – they need cash, and now, to pay the rent and keep on as many staff as possible.
The first package also failed to grapple with the cashflow needs of households – basics like rent, mortgage payments and food.
Pressure is building on the Morrison government to make sure people aren’t turfed out on to the street because of the crisis.
Overseas, the UK has banned evictions for the duration, while the US has banned foreclosures and evictions for two months.
The opposition Labor party would like to see something similar in Australia, plus measures to make sure no one is cut off from essential services including electricity and water.
Markets will also be closely watching the size of the package.
To give some context, the RBA’s small business loan package alone is worth about 4.5% of gross domestic product.
French government stimulus is about 12% of GDP.
By contrast, Morrison’s first attempt was just 1.2% of GDP.
He will need to emerge with a far larger figure on Sunday or markets will tank – even more than they would anyway – on Monday morning.
