The world is engaged in a vast and unprecedented experiment: what happens when you engage in a coordinated global shutdown of economic activity? Nothing like it has ever been done before. Anyone who claims to know how the post-virus recovery will play out is simply speculating.
But certain industries and companies have a better idea than others of how things will look this time next year when, hopefully, the virus is no longer a major threat.
Two weeks ago, Air New Zealand boss Greg Foran emailed staff to tell them, “clearly, we will be smaller for some time and we will need fewer staff,” and that “we expect that even in a year’s time we will be at least 30% smaller than we are today”.
Foran not merely runs a company that has been smashed by the virus; he is enormously experienced in customer-centric industries. He was foolishly passed over by the Woolworths board for the CEO role when he was the giant’s head of Food and Liquor. He left to work for Walmart, first off running the giant American groups’s Chinese operations and then was brought back to the US to lead Walmart’s biggest business, its US stores. He started the Air NZ gig early this year.
On the day of his email, Air New Zealand started cutting 3500 of the 12,500 people employed globally by the airline. The airline’s revenue had rapidly fallen from NZ$5.8 billion to around NZ$500 million. That’s 90%.
Foran knows there will be no v-shaped recovery for the aviation industry — and probably not even a u-shaped one. The entire industry, apart from air freight, is now closed internationally and severely curtailed domestically. Planes are being parked by the score.
When international passenger aviation is allowed to resume, the process will take time, and it will be patchwork, with countries identified as having defeated the virus ready to expand domestic aviation but still reluctant to open their borders to countries where the virus remains rampant. For example, surely no one should open their borders to Americans for the rest of the year.
Business travel is likely to remain depressed, especially if companies get used to remote working and teleconferencing and the lower costs it enables.
Tourism is unlikely to bounce back quickly, although the industry will drop prices to try to get people holidaying again (regional Australia, which is reliant on tourism and more economically fragile than urban areas, will take longer to recover).
So you can see why Foran thinks his company will still be at least 30% smaller even 12 months from now. There’s no reason to think Qantas and Virgin will be any different.
However, airlines are atypical: there will be fewer impediments to other sectors re-opening. That’s one reason why overall economic indicators like GDP — which will show a huge contraction in the current and next quarter when the data are eventually released later in the year — aren’t that helpful in assessing any recovery: different sectors will face different challenges.
The removal of lockdown restrictions will likely see cabin-feverish consumers flock to cafes and restaurants and pubs, eager to finally socialise again.
Many hospitality businesses probably won’t reopen again, their owners having been wiped out by the shutdown. But others will take their place.
There’ll be less money for discretionary spending in households but there’ll also be an employment surge as the hospitality and retail sectors put stood-down staff back to work and start hiring again. The “siege is lifted” feeling will inject life into the economy again.
Some sectors like manufacturing, will have come through relatively unaffected or, in the case of supermarkets, thrived.
The biggest employing sector of the economy, health and social care (especially the NDIS), will likely emerge from the crisis as even more dominant as our single-biggest employer.
But overall, the capacity of business to start up investment again will be limited by balance sheets smashed by the crisis, with capital reserves run down and debts run up, limiting any expansion plans even with tax concessions to encourage spending.
Much will depend on the ongoing psychology of the community.
Remember, things were fragile before the crisis, and households have struggled for years. The government’s ability to engender confidence will be hamstrung by the colossal debt it has, correctly, amassed to get the economy through the immediate crisis. Once it has passed, the fiscal pressure will be on to find ways to curb spending and increase revenue to start paying down a net debt that in excess of 30% of GDP.
The next round of tax cuts, despite government assurances, now look problematic.
Our biggest defence project, the $100 billion (and counting) Franco-Australian submarines, must surely be scrapped or delayed. Tax lurks for wealthy older Australians of the kind Scott Morrison defended to the death at the last election are back on the agenda, even at The Australian.
One driver of that will be the fact that, as Wayne Swan found after the immediate threat of the financial crisis had passed, revenue from company tax is likely to be lower for an extended period.
We may also lose our triple A credit rating. But the debt:GDP metrics of every AAA-rated economy (even Germany and Switzerland) will rise now. And in any event, with interest rates low for years to come, the cost of debt will not a major burden.
Governments will also have two difficult decision points that will bear on how quickly we recover: at what point do they begin easing restrictions and allowing people and business to start moving again? And what happens if the virus flares up again? Do lockdowns become a permanent part of life until a vaccine is perfected and distributed?
The other point is when to cut off the current stimulus and survival packages.
These are designed, rightly, to be temporary. But the federal government will face a tough call in August about continuing the JobKeeper payments if unemployment is in double digits and there’s no sign of lockdowns being lifted. Any decision about cessation will end up disadvantaging some businesses and workers, but it can’t be open-ended.
The best-case scenario is that the virus is defeated in a couple of months and we can start sitting in the winter sunshine in cafes across Australia as the third quarter begins. But as people like Foran know, the reality is likely to be longer, more difficult, and far more uneven than anyone, including many in business, realise.
“The removal of lockdown restrictions will likely see cabin-feverish consumers flock to cafes and restaurants and pubs, eager to finally socialise again.”
Maybe, but quite possibly not. Once people learn to avoid a thing they associate with risk it becomes difficult to change their view. Cycling on the road without a helmet is an example. The actual risks involved can be rationally debated, but in practice, in a place like Australia where the public has been told for years that it is dangerous, many people have acquired a basic emotional fear of cycling without a helmet that is beyond reason. They will not do it even in places where it is legal because the prospect fills them with anxiety, not because they have accurately assessed the risk. I don’t know how easily people in general will unlearn the social distancing they are now learning. Given that anyone who has not already had COVID-19 will remain vulnerable to catching it regardless of whether restrictions remain in place perhaps it would be no bad thing to continue, at least until everyone is vaccinated.
It would be preferable that people did not flock (appropriate word!) back to overpriced eateries because they realised they were being ripped off and served by the underpaid desperate for work not matter how demeaning.
That would require an aware and ethical population and…. oh, yeah.
As you were.
Hey there, I just have a bunch of questions. I keep reading stuff but I never see anything that addresses them. Can anyone answer these for me??
BORROWING FROM WHOM?
If every government in the western world is borrowing heavily to subsidize the unemployed masses, who are they borrowing from? Are the big four loaning money to the government at an interest rate and getting hand outs from the government for no interest? Is China loaning money to us? Where is the money coming from?
WADDABOUT THE NEXT ONE?
Also why isn’t there any discussion of the other other reality? – the one in which we have another virus like this and another shut down in the not too distant future? As long as people keep eating animals that haven’t been raised in proper agricultural standards of animal husbandry, won’t this just keep happening? I mean we’ve already had SARS and Swine Flue and now COVID… is it rational to assume there won’t be another and another and another?
Can anything be done to find a quicker way to create vaccines?
WADDABOUT ANTIBODY TESTING?
We hear a lot about testing for the presence of the Virus. That only proves that the person doesn’t have it TODAY. They could easily have it tomorrow if they don’t follow all the precautions.
What about antibody testing? Wouldn’t it be smart to know who has already been exposed and recovered and is now immune so that at least they can get out and about and support the small businesses? Once a person is immune they will stay that way for some months at least. I would really like to read something that addressed this question. I realise I am just an interested by-stander and there may be a really good scientific answer I would just like to hear it.
Thanks
Raz Ellen.
I assume that you know the answers because you have asked the only pertinent questions.
Answers abound in the public sphere, every pub bore or pet shop cocky has a dozen – sadly, sensible questions are always lacking.
Too many people have too much to lose so avoid them.
Borrowed from whom ? First thing Raz is to put Household economics out of your mind. Bank finance is counter intuitive to the everyday. First your savings in a bank make you a creditor of that bank so appear on the banks balance sheet as a liability. If you borrow money from a bank you owe them money so appear on the Asset side of the banks balance sheet. So a debt is an asset and a deposit a liability.
When a bank loans out money it doesn’t have a dollar in its safe for every dollar lent out. Banks have the singular ability to create ‘money’ out of thin air or in our times by a keystroke.
The Reserve Bank of a country that issues its own currency also has that power to create ‘money’ out of thin air. Until the 1970’s the money created by banks was used to finance the Private Sector and the RBA created money to hand over to the Treasury for it to use to balance the Nations economic activity, the Treasury could also withdraw money from the economy to dampen down inflation. Then things changed, certain banks were given an extraordinary privilege, the RBA no longer directly funded the Treasury, only the select group of banks who then lent that money to the Government, the RBA lent at a low rate to the banks who then required a higher rate to finance the Treasury Bonds. That is where we are today and how this lot of borrowing is being financed. The taxpayer is required to pay the interest required by the Banks for purchasing the Governments Bonds using the funds passed to them by the RBA.
Wadda about the next one. The common factor to most of these virii is that they come out of a natural host, bats especially for covirii, all the recent ones have transferred from bats to another host, pigs, Swine Flu and camels, MERS for example, the intermediary host for COVIDS19 is currently not known. Animal husbandry is important in general but not a factor in this pandemic. The critical factor is that the original host virus changes sufficiently to jump across species. The particular COVID19 virus that has infected humans has a,ready evolved into different strains, China identified two a S, and L and S strain whilst dealing with its infection. They each had different effects on their human hosts. By now there may be more as anecdotally reported..
Antibody testing. That is already being done where it is required by Govt protocols, hi a has used them in its return to work process.
That’s my understanding, no doubt I will be corrected.
“The removal of lockdown restrictions will likely see cabin-feverish consumers flock to cafes and restaurants and pubs, eager to finally socialise again.”
Assuming those in lockdown still have jobs/income and the pubs and cafes are still operating.
“Many hospitality businesses probably won’t reopen again, their owners having been wiped out by the shutdown. But others will take their place.”
I suspect that “others will take their place” won’t happen anytime soon.
The virus will be “defeated” when there’s a vaccine. Not before.
In the same way the Flu has been defeated – with vaccines that are somewhat effective and greater natural resistance to the virus in the future – even if people don’t develop immunity after contracting the virus.
The reality remains to be seen Wayne but there are always several strains of flu and they change each year. Annual flu vaccines compound is about making an educated bet / guess.
The hope and current thinking is that this cv19 causing virus doesn’t mutate much and a vaccine should be quite successful ongoing.
But as I say, we’ll see. We’ll also see about this economic recovery. Airlines are not a good guide nor are cafes. As you point out lots of the economy is still ticking along and some bits booming.
Lots of scaremongering about the debt but as others point out, still so far, less than the extra debt totted up by the COALies from 2013-19. What really sticks in the craw of many is the dreadful idea of bucketing out cash to the lumpen proletariat at any time crisis or not.
My point is that people have better resistance to new flu strains because of vaccines that are basically designed for last year’s strains. And, sometimes, having had the flu in the past.
Most ‘flu originates in water fowl, commonly ducks, migrating back & forth across the Eurasian land mass as they’ve done for untold millennia.
That is why every year there is a new strain – it’s called adaptive evolution.
I don’t think Australia’s strategy is to wait for a vaccine. A flattening of the curve refers to a mitigation strategy – a controlled spread through the community. The WA CMO gave a good presser explaining the strategy, something which our Government is failing to communicate properly. If we plan on suppressing the virus and waiting for a vaccine we would not be trying to increase our ICU capacity by a magnitude like we currently are.
Govt would be crazy not to increase GST. May not be received with enthusiasm but at least with understanding.
(BTW re Subs project – cancel the damn thing ASAP and buy half a dozen off-the-shelf from somewhere. The Cost saving would be huge!)
go better than that and just lease them off Japan on a per day operational basis.
japan will pay for all the development and building and charge us after they operate for a 24 hour period.
we’d could probably even get japan to do a chunk of the work in Australia.
best deal we could ever get – and a perfect security and defense manufacturing alliance.
The Subs – I fear you have misunderstood this project. It is not and never was about providing the navy with the means to defend Australia, although I’m sure the government thinks that would be nice if it happens. The primary purpose is to use tax payer money to buy votes for Liberal pollies in South Australia through subsidising jobs regardless of the cost. Buying off the shelf or leasing from elsewhere will absolutely not do. You cannot put a price on getting a Liberal into parliament.
Cannot agree that raising the GST has anything to commend it. It is a regressive tax that hits hardest on those with the least money. COVID-19 is already having the worst economic effect on those who can least afford it, but the disease is being spread disproportionately by the wealthiest in society – see all the maps showing cases are concentrated in the wealthiest suburbs. And all this economic disruption is falling hardest on the young (mostly less well off) in order to protect the more vulnerable (mostly the older and wealthier). So raising GST would simply multiply the unfairness and injutice. If taxes are required to pay for this the government should to start with look at income tax along with all the loop holes in capital gains. It would also be an excellent move to treat as income any inheritance or bequest that anyone receives, although a tax free allowance of some fixed amount before taxing the rest if the inheritance would be reasonable. (Doing it this way means it’s not a ‘death tax’ because it is not taken from the estate of the deceased, it’s taken from the income of whoever receives it.)
I’ve already seen people in the Age comments crying at the possibility of a “death tax”.
These are often the same people that think that unemployed people don’t deserve the money they get because “they didn’t earn it”, but are OK with people inheriting money that they didn’t earn either.