The fact that Australia’s stock analysts were surprised by the level of National Australia Bank’s bad and doubtful debts indicates that many still don’t fully understand what happens when an economy goes into a recession.
That’s a danger to the sharemarket because NAB, as a major business bank, is hit early in the business chain. Those further down, such as banks with big consumer lending, plus many retailers, will be affected by the flow-on as sure as night follows day.
Our smarter companies know what is going to happen, and are preparing for it. It’s important that the analysts also cotton on and monitor this preparation and are not surprised by the outcomes.
As we have seen so many times in past decades, the first to fall over are large, highly borrowed enterprises and those that can’t maintain their debt structure. This is the prominent part of the recession.
Then the slump moves into the general business community, which is where it is now. In this stage of the recession, the impact on the business community is widespread but harder to monitor. The NAB is on the front line and is making provisions.
In the next stage, a wide range of companies either fail or adapt their business, so unemployment rises. Chris Richardson of Access Economics says that unemployment will go to 8.5%. Gary Morgan of Roy Morgan Research has been warning anyone who will listen that the official unemployment figures tell only part of the story, and that there is a vast army of under-employed that are hidden by the official figures.
In this slump, those under-employed will be boosted by the large number of contractors who will work lesser hours and the desire of older people to work because their superannuation has been decimated.
Economist Ed Shann takes this data one step further, and estimates that if official unemployment reaches 8%, then nearly one third of Australian households will find that at least one member will be affected with lower income. If the official unemployment rate were to rise to 10% by the end of 2010, then 40% of Australian families would be affected. These are big numbers.
Shann is one of a rising number of global economists who say that the damage to the financial system and asset values has been so large that this recession/downturn will not be a short affair, as Treasurer Wayne Swan predicts.
Whether unemployment peaks at 8% or 10%, it’s important for everyone to understand the extent of the problem, which will affect wide areas of consumer spending.
This article first appeared on Business Spectator