The thing about events which are unprecedented, is that no one knows what the hell will happen.
It’s human nature to look through a positive lens. That’s why sharemarkets and property markets have largely gone up for two generations since 1983 (with just a few blips in 1987, 1992 and 2008).
But this period of unprecedented expansion has coincided with a massive increase in debt around the world (but especially in the US, Europe and China). It’s been so long since we’ve seen a protracted downturn that it seems like no one knows what to expect. Forty years of a relentlessly positive trajectory will do that.
The demand shock that’s currently unfolding feels more like the Great Depression or a World War than the global financial crisis.
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There may be a couple of ways to get out of this mess.
The first: by some miracle, an effective viral treatment is discovered using existing drugs (that don’t need to be clinically proven like a vaccine). That, however, isn’t overly likely.
The second: a full lockdown (like what China was able to execute). That is a slightly stricter measure than what was proposed by the Victorian and New South Wales premiers on Sunday. In China, no one was permitted outside their premises other than one person buying food each day.
China showed that a strict lockdown works: within 14 days you know everyone who has the virus and can contain and properly trace it.
Scott Morrison’s half measures and suggestions that we face six months of tight restrictions are likely to massively exacerbate the economic calamity. If Morrison’s six months of half measures are enacted, here are some of the likely economic implications:
Airlines: Many will be nationalised. The extent of job losses will depend on governments, but it likely won’t be pretty.
Restaurants: They operate on wafer-thin margins at the best of times, so the majority won’t make it (many are already frantically sacking staff to stay afloat). Delivery/takeaway-focussed businesses may scrape by.
Services: Hairdressers, beauticians, massage therapists, gyms. First, staff will be sacked. Then, leases will be given up and businesses shut (although these businesses can eventually reopen as they require minimal capital).
Sporting clubs: It’s hard to see many surviving without significant government support. Many have been loss-making during the greatest period of economic prosperity we’ve ever seen.
Live venues, pubs and clubs: Dead. They have high fixed costs and literally may not be able to open for a year.
Hotels and main street travel agents: Mostly dead given high capital costs.
Construction businesses and property developers: May survive in the short term if they can shrink their cost bases enough, but the subsequent depression will finish them off.
Marketing and media: Will probably slip into administration and be acquired by lenders. The first thing businesses cut (and already are cutting) is marketing. Even Google and Facebook, virtual monopolies, have dropped more than 30%. Most Australian media companies like Nine, Seven or HT&E are down by 50% or more.
Retailers: Those which rely on discretionary spend, like fashion or electronics will most likely be forced to the wall. The only exception would be online retailers, which have a far lower cost base and will likely do better when people aren’t able to leave their house as easily.
Professional services: The businesses of lawyers, bankers, accountants and consultants may survive by drastically cutting costs bases (read: sacking swathes of employees) and probably merging.
Banks: They’re probably too big to fail due to years of government stupidity, but may need to be nationalised following an eventual property collapse, forcing future generations to pick up the tab.
Weaker businesses without a cash buffer, or with a high financial or operating leverage collapse, will cascade to skyrocketing unemployment. That will exacerbate the demand shock and cause relatively strong businesses to suffer, potentially forcing them to insolvency. The vicious cycle continues.
Ultimately, the only businesses that will survive are those which service human needs (like supermarkets, doctors, pharmacies, essential services) and businesses with very significant cash buffers, extremely strong market positions and a more flexible cost base (low financial leverage).
China showed that drastic and urgent measures, which Australian governments have inexplicably still not put in place, can allow a domestic economy to recover in as little as six weeks.
Fail to enforce a strict lockdown and it’s feasible we will see unemployment rates of upwards of 40% (unemployment hit 25% during the depression, but that was when most women didn’t participate in the labour force) and a sharemarket drop of more than 80% (bearing in mind the Dow Jones dropped by around 70% between 1966 and 1982).
Now isn’t the time to focus on stimulus (that time will come, later) — stimulus largely alleviates the symptoms. It’s a like using a garden hose on a bushfire. Instead, governments need to do everything in their power to stop the cause. We need a mass lockdown.
This article was first published by Crikey.