- With Melbourne entering stage four restrictions for six weeks, and greater Victoria entering stage three, 250,000 Australians are expected to be stood down.
- However, as large wholesale sectors shutdown, the impact of the lockdown will go beyond state borders.
- Unemployment, underemployment, and business insolvencies are all expected to rise, with the federal government facing pressure to increase economic support rather than taper it off.
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As Victoria implements the strongest lockdown measures in the country, businesses and jobs are expected to suffer beyond the state’s borders.
The measures, while deemed necessary by the state and federal governments, are undoubtedly costly ones. In pure monetary terms, they are expected to blow a $7.5 billion budget deficit in Victoria alone – its first since Australia’s last recession in the early 1990s.
Representing around a quarter of the national economy, however, the pain will be shared by more than the residents of Melbourne.
“Most of this productivity [occurs] in the wholesale (18.7%), retail (13.7%), construction (13.5%) and manufacturing (12.8%) divisions. All of these sectors are expected to come to a virtual standstill until mid-September 2020,” IBISWorld senior industry analyst Matthew Barry said.
In human terms, Premier Daniel Andrews warned the shutdown will stand down some 250,000 Victorians, as entire sectors either freeze temporarily or operate on a significantly reduced basis. Take construction sites for example, where head counts will be cut back to 25% on buildings above three stories. Smaller sites meanwhile won’t be able to welcome more than five people at any one time.
The direct impact is huge, as people stay home, tighten their purse strings and fret over their finances. Affected businesses can receive up to $10,000 grants, and existing JobKeeper and JobSeeker payments will continue to be made to eligible parties, but the support will pale in comparison to what has been lost.
“We would expect a more prudent consumer in this phase given the escalating nature of health risks and also line of sight to stimulus tapering likely constraining intentions versus earlier experience,” Morgan Stanley analysts wrote, noting the pace of recovery will slow.
Even before the latest lockdown phase, the impact was clear, as spending contracted 11% according to ANZ data.
#melbournelockdown (before Stage 4) eroded much of Vic's spending growth in Jun/Jul & softened activity in NSW. For the week to 1 Aug, Vic was down 11% y/y and NSW was up just 3.5% y/y. This contrasts with Aus ex NSW & Vic, which grew 8.2% y/y. @ANZ_Research @davidplank12 #ausbiz pic.twitter.com/kuv8tSzZPD
— Adelaide Timbrell (@AdelaideTimbrel) August 4, 2020
As a result, businesses cash flows are expected to dry up and the risk of insolvency will rise. However, the bill will likely be far greater as subdued economic activity drags on the broader national economy and puts a floor under unemployment.
“These restrictions will delay the labour market recovery and will push the economy toward a fall in output in [the] third quarter – indirect spillovers are expected to materialise in business supply chains and confidence,” Oxford Economics analysts wrote on Tuesday.
The first state likely to see confidence fade will be in New South Wales, the largest state economy, where concerns over Victoria have already kept people at home.
Prior to the latest set of restrictions, AMP Capital economists expected $5 billion to be wiped from Australia in those three months to September. They have since revised that to up to $12 billion. In other words, the impact is set to be almost 2.5 times worse than before the shutdown. Beyond that, it could see the Australian economy shrink again in the final three months of the year, lengthening Australia’s first recession in 29 years further.
Royal Bank of Canada’s Australian strategists expect headline unemployment to rise up to 9%, but warn real unemployment will be worse as more and more businesses are simply supported by JobKeeper payments.
“This will continue to flatter the unemployment rate, which will also likely be tempered by lower participation in a soft labour market. These trends will intensify under this next stage of restrictions, but we also need to build in more permanent job losses as businesses close,” Su-Lin Ong and Robert Thompson wrote in a research report. They also noted that hours worked, underemployment and participation in the labour market will all deteriorate in the coming months.
With the Reserve Bank, which meets again on Tuesday, having already cut interest rates to the bone and jumped into the bond market, there’s little it can really do beyond more unconventional policy measures.
Interesting for the #RBA this week, with now clear downside risk to its doing-better-than-expected narrative will it seek to add more stimulus itself or will it continue to push the burden on to fiscal policymakers? I suspect the latter for now at least #ausbiz https://t.co/9QSBmWc6Jq
— Alex Joiner (@IFM_Economist) August 2, 2020
It opens the door for the federal government to provide greater stimulus and support. While Prime Minister Scott Morrison announced on Monday it would provide two-weeks of paid pandemic leave for workers, it is a measure so far limited to states that declare a ‘state of disaster’.
As a result, economists are again urging it to step up fiscal spending, as opposed to simply cutting it back. As Victoria’s lockdown indicates, budget deficits are due to run higher even without spending.
Instead, with jobs and businesses increasingly at risk, the government may be facing few other alternatives.