The end of federal assistance to businesses and workers will be a pivotal point in how Australia emerges from COVID-19 lockdown.
The end of federal assistance to businesses and workers will be a pivotal point in how Australia emerges from COVID-19 lockdown.
Alcohol and food aside, when is too much of anything a negative?
The answer to that question is becoming more obvious by the day, as industry after industry stumbles into a price-crushing crisis of excess inventory, overstaffing, and lack of growth.
Government aid in the form of the JobKeeper and JobSeeker programs is propping up the Australian economy, with the real challenge for businesses to start as this assistance is ended.
The term ‘zombie companies’ has re-entered banking terminology.
It refers to the painful process of deciding which clients remain a reasonable credit risk, and which are exhibiting the traits of a zombie (the living dead) and should be allowed, or even encouraged, to die.
Virgin Australia is an early example of a business that has all but died.
Currently it is being kept alive by an administrator until sold, while losing money every day its planes are kept out of the air by COVID-19 travel restrictions.
Virgin is not an orphan, even if other members of the zombie club are hiding in the shadows of JobKeeper and can’t yet be seen clearly.
Over the next three months the living dead will be dragged into the open as the September 30 deadline for JobKeeper nears and a whole series of unpleasant questions are asked of company directors, such as: Have you been using government aid and a short-term legal moratorium to avoid a charge of trading while insolvent?
Until the COVID-19 pandemic broke across the world, all directors were required to ensure their business could meet all its financial obligations when they fell due.
Suspended when the Australian government unfurled its aid package, that legal requirement will return when the artificial props are removed (and directors will need to consider whether they’re leaving themselves open to the criminal charge of trading while insolvent).
Some directors will act well before the aid deadline is reached because they know their business will not survive the return to normality – a ‘normal’ certain to be a lot tougher than the old normal.
A checklist of how things look for different business sectors is a sobering exercise; and while there are some winners from the economic lockdown, such as online shopping, they can probably be counted on one hand.
• Aviation
After Virgin, there is a long line of deeply troubled airlines, including Emirates, the long-haul leader that is reported to be considering a 30 per cent cull of its global workforce, which means 30,000 people could soon lose their jobs.
While the core problem is a ban on inbound flights by some countries, a secondary issue is that potential passengers don’t want to be in a confined space with other people.
In addition, too many planes are parked. There are also too many pilots.
• High-rise office blocks
Present a triple challenge for their owners in CBD locations.
1) The discovery that working from home is a viable option thanks to high-speed internet and conferencing software, which could lead to a 25 per cent fall in officespace requirements.
2) Health concerns about public transport needed to get workers from the suburbs to the city.
3) Elevator capacity constraints, which will limit the number of passengers per trip.
• Shopping centres
In trouble before COVID-19 but now in even deeper trouble as households discover the simplicity of internet shopping with home delivery.
Doubts about whether the home delivery option was viable have been blown away during lockdown.
• Retail
Retailers without an internet option will be rushing to create one, or risk their own survival.
Investment bank UBS singled out Woolworths and Coles as two retail internet winners because of their well-established internet shopping option, while IGA brand owner Metcash copped a downgrade because it has not developed an internet option.
• Restaurants
A business that struggles in the best of times has become a dog-eat-dog fight for survival because of government-mandated capacity limits.
There were too many cafes and restaurants before the crisis, and that issue will expose more operators after.
• Conference circuit
This sector is in deep trouble, as with other mass gatherings such as sporting events. From a business perspective, the best example is the annual conference of the Australian oil and gas industry, which was scheduled for Perth this month but has been moved to June next year.
• Car dealerships
Have already taken a knock from potential buyers who have delayed making a decision because of the appeal of an electric car some time in the future, car dealerships now face a market impoverished by job losses and buyers surviving on social welfare.
• Tourism
Good, in parts. Domestic tourism should survive thanks to Australians holidaying closer to home, but it will be a struggle for operators once dependent on inbound internationals who are no longer arriving.
• Agriculture
Woolgrowers had been looking at a reasonable season but have woken to a price-crash as demand for high-quality clothing in primary markets such as Europe dries up and China emerges as the only big buyer of the Australian clip. (But for how long, as a trade war simmers, is the worry.)
• Miners
Some are riding high on strong prices for iron ore and gold, but others are being hammered by excess supply and tumbling demand.
Lithium is the most obvious problem area, with new mines and processing plants being mothballed.
But there’s also trouble in the emerging potash sector, as new projects struggle to be completed and global demand for the crop fertiliser declines because farmers can’t afford to buy as much this year as they did last year.
• Oil and gas
These two commodities more than anything else demonstrate the too-much-is-a-bad-thing thesis, with collapsed demand at a time of COVID-19 and excess supply caused by a price and market-share war waged by Russia, Saudi Arabia and the US.
• Money
As strange as it sounds, the world currently has too much money in circulation despite even more being created by governments propping up their economies.
Over time this wall of cash will do two things. It is likely to help avoid a global depression, but it will also ensure the return next year of inflation and a whole set of new problems, which will have households and investors scrambling to protect their savings.
Wherever you look there is a world unbalanced with too much of everything chasing impoverished consumers who can’t afford what’s on offer (or soon will be unable to pay when government aid dries up).