This week we have been heartened by the record 16.4% increase in the Westpac Melbourne Institute Consumer Sentiment Index. Admittedly it has followed a record 17.7% fall in the Index in April.
But the Index is now only 7.6% below its average level for the period September to February before governments had imposed any restrictions. Of course, there was in January and February coverage of the COVID-19 crisis in the media but we did not detect any impact on households’ confidence levels.
Two aspects of the survey were particularly interesting.
Firstly, there was a 10.7% increase in the component of the Index – “outlook for the economy over the next five years”. This component is now 50% higher than the average we saw in the last recession of 1989–1991. Deep recessions grind on for years and individuals lose hope for the future without any clear evidence that the economy is likely to recover. That feeling of despair and hopelessness is not apparent in this latest survey. Respondents believe they can see a process that will restore the economy to some sort of equilibrium driven largely by Australia’s success in containing the spread of the virus.
Respondents understand that the sudden collapse in the economy has resulted from government policies designed to contain the virus. Reasonably, they are concluding that the restrictions will be gradually reversed with the dominant risk being a damaging second wave if restrictions are eased too quickly.
That message was exemplified in the survey results where confidence differed significantly between the two major states. Confidence surged by 23% in NSW, where some tentative early easing in restrictions has been announced and progress in containing the virus has improved significantly in recent weeks. However in Victoria, which has seen some recent outbreaks and less progress on easing, confidence was only up by 8%.
Secondly, we saw a 13% improvement in sentiment about job security over the next year. That lift largely offset the 17% deterioration we had seen over the two previous months. Again, although the immediate state of the jobs market is parlous, we see that households are looking ahead with renewed confidence.
We recognise that the progress around containment of the virus remains the most significant risk to the outlook for the economy.
But even if the health profile remains on a stable path of containment, another known risk looms as a daunting challenge to the economy.
Without doubt, the policy initiative that lifted the spirits of Australian households and businesses and protected Australia from a catastrophic increase in the unemployment rate and an associated surge in insolvencies, was the JobKeeper Payment scheme.
This policy has been targeted at keeping workers linked with their workplace. A business qualifies if it can provide evidence that revenue has fallen, or is expected to fall steeply over the year to March 2020 – by 30% for businesses with less than $1bn in turnover and or 50% for those with turnover above $1bn.
The Payment of $1,500 per fortnight is available from March 31 to September 27.
The Australian government estimated the cost of the Payment as $130bn (around 6.5% of GDP), with the costing based on six million workers being covered. Note that the stimulus is highly concentrated in only six months of the year, although it does span two fiscal years.
Australia’s total workforce is around 13 million. So the policy was designed to cover nearly 50% of the workforce.
I expect that the government would have been mindful of the potential shock to the economy at the time that the payments were scheduled to be withdrawn.
However it appeared to me that the government had factored considerable flexibility into the Payment, not really expecting that businesses covering nearly 50% of the workforce would qualify.
Consider the employment numbers in various industry sectors, where it seems unlikely that a large share of entities would qualify for the scheme: agriculture 327k; mining 247k; manufacturing 894k; utilities 155k; construction 1,176k; telecommunications/media 210k; transport/postal 921k (of which air travel is around 100k); finance 450k; professional services 1,150k; government administration 450k. In the case of education (1,067k) and health services (1,725k) the government of course is a dominant factor.
Other sectors that would reasonably be expected to dominate the scheme are: (parts of) retail and wholesale trade (1680k); accommodation and food services (921k); real estate services (218k) and Arts and Recreation (254k).
The first shock that the crisis was more widespread for businesses came with the release of the Payroll figures from the ABS for the period March 18 to April 15.
It showed a wider impact on jobs than I had expected: agriculture – down 9.5%; construction down 6.5%; retail trade down 6%; professional services down 6%; government administration down 5%. On the other hand the big industries such as health (down 3%); education (down 0.2%); and utilities and finance (hardly affected) still indicated, to me, that the JobKeeper Payment would hardly cover nearly 50% of the workforce.
Consequently, I was surprised when the Treasurer announced in Parliament on Tuesday that the JobKeeper Payment had been taken up by 835k businesses covering 5.5 million employees. Yesterday he provided a verbal update that the number now exceeds the original 6 million target.
My expectations that there would be considerable ‘slack’ available in the Package to provide those businesses that were still under some pressure by end September with extended assistance have been severely jolted.
With international travel restrictions and social distancing guidelines still likely to be firmly in place by the December quarter it seems certain that there will be a wide range of businesses that will require extended assistance.
A reasonable test for businesses to continue to receive support past September could be whether the businesses were profitable over the year leading into the COVID-19 period and their revenue collapse was entirely due to the direct (and indirect) effects of the policies associated with the containment of COVID-19.
The government will need to ensure that the “one size fits all” policy that was hastily adopted does not allow zombie companies to be supported beyond September. There are numerous examples in other countries (consider Japan in the 1990s) where government stimulus at a time of economic crisis was exploited by unsound companies to stay in existence longer than they should have.
The biggest challenge will be to recognise that when economies experience a crisis they come out of the crisis with permanent structural change.
Some companies that were adequately profitable under the previous structure may never recover as the economy changes.
In the early stages the government should not be too quick to base decisions on forecasts of structural change – better to allow the economy to evolve before condemning good companies to insolvency.
For example, it could be assumed that social distancing will be a permanent aspect of the ‘new’ Australia. That forecast may be wildly wrong in the event of a vaccine or a widely available treatment for COVID-19.
Governments should also be aware that Australia’s net debt position is likely to reach around 35% of GDP if JobKeeper is immediately unwound. That still puts us in a very strong position on a global basis (the US likely to reach 125%) and should not be a constraint to supporting good businesses if more time is required.
Banks will also be in similar positions of having to make some hard decisions. Banks have supported their customers and the economy by deferring interest payments on $200bn of loans with a likely sunset timing of around that September period. The resumption of interest payments will also represent a headwind to businesses preparing to deal with the end of JobKeeper.
An associated difficulty for the government will be the JobSeeker Package. Recall that it has seen base payments increased to around $1,100 per fortnight (almost double Newstart) with 1.4 million recipients. Any worker who lost the JobKeeper package and became unemployed could move to JobSeeker, with around a 25% reduction in payment.
But the government will be aware of the need to balance the social need to provide an acceptable living wage for the unemployed with the risk of pricing the unemployed out of the job market; forcing a permanent increase in the unemployment rate; and setting the foundations for generational unemployment.
Some respected ANU academics have suggested a grant/loan model to handle the scaled unwinding of JobKeeper. Businesses would be extended loans to maintain their wage payments with the repayment profile being determined by the revenue performance of the company. Loans are only repaid when the targeted revenue levels are achieved.
Such an arrangement would still require the lender (the government) to assess whether the borrower’s business model, which may have been sound before the crisis, could continue profitably in an economy that had changed structurally.
These are considerable challenges which have been so much more acute by the extraordinary take-up of the JobKeepers Payment.
On the base line assumption (which is the Westpac view) that the restrictions will be smoothly relaxed over the next four months the enormous challenge for the government will be maintaining the recovery in the face of a huge negative fiscal shock as JobKeeper is unwound.
Let us hope that the policy balance favours the ongoing support of viable businesses rather than a perceived need to withdraw supports, whatever the cost.
