The economic impact of the COVID-19 pandemic on Australia and New Zealand is going to be enormous. The governments of both countries have already announced substantial support packages, the central banks are easing monetary policy on a vast scale, and the private sector has begun to make enormous changes in how they do business.
The scale of the impact from a public health perspective is enormous. Everyone apart from essential workers self-isolating is going to happen within weeks. Many experts suggest it should already be in place, and some businesses able to offer working from home have already embraced it. For businesses, this is a massive health and safety issue. Your people should not come into the office unless they have to.
For frontline workers, enormous focus on deep cleaning and provision of appropriate safety equipment is the bare minimum you should be providing. If a business is making no revenue, it needs to cut its costs. It no longer matters if there are contracts involved. Fixed expenses will go down.
The advice from public health officials is always changing. However, the impact of social distancing and self-isolation means that the hospitality and tourism sectors are now over. For the duration of these restrictions industries in deep trouble include aviation, most non-essential retail, and any discretionary or entertainment spending.
What this crisis and the response is highlighting is the fragility of the current economic order. Casual workers, households and small businesses are now the unprepared shock absorbers of risk in the system. The rapid deterioration in asset prices around the world represents a rational reaction to uncertainty over what the present value of those future cash flows is under these economic circumstances.
However, asset prices going up or down doesn’t help households paying bills. The inflexibility of many contracts entered into by businesses or families will accelerate the economic fire we are experiencing. The relevant public health requirement of social distancing flies in the face of economic reality for many households. They simply cannot afford not to work, and their small business cannot afford to operate with $0 in revenue.
There are many ESG risks for firms here. How do they treat their employees? How do they treat their customers? How do they treat their suppliers? Doing the right thing is more important than ever. The behaviour of firms throughout this process will be under the microscope, and any poor decisions will be franchise destroying. All of the goodwill built up inside a brand or reputation can be damaged by making silly decisions like making people come into the office when they can work remotely.
The operating model impacts will be severe. Because of the fragility of many value chains, the reliance on outsourcing, and lack of investment in technology over many years, the inability of some firms to deliver on their contractual commitments after they implement their business continuity plans will become glaringly obvious.
Some companies are doing the right thing: everyone who can work from home already is, flexibility with customers and suppliers, and customers treated properly with credits or waivers offered due to radically changed circumstances.
Some companies are not doing the right thing: lobbying for taxpayer money when there are higher priorities, worrying about their particular industry when this is a societal issue, or treating the parties they have contractual relationships with inflexibly.
Boards and senior executives will need to think very carefully about the impact of their decisions on their communities. Their customers and employees aren’t silly – they know the implications are likely to be negative.
If there are six months of drastically lower economic activity, protecting essential capabilities ability to deliver key value streams on the other side of the slow down is an important consideration. For example, airlines need to preserve some ability to operate domestic flights and cargo freight.
The overall economic impact will be much higher than 10% of GDP. Unemployment will be more than 10% in Australia and New Zealand within months. Underemployment will be even worse because of the number of casuals now out of work and part-time workers who will never get more hours under these circumstances and could also have to take leave without pay to keep their jobs.
The unfortunate economic response from governments so far has been very much about business. This focus underestimates the economic impact of this crisis. The real issue is people being able to pay their bills. If hundreds of thousands of companies go to the wall, asset owners and lenders should be taking a hit. This reality means commercial landlords being flexible with their tenants and banks bending over backwards for their business and institutional customers will be necessary.
The pace of this economic slowdown is so fast that attempts to use fiscal and monetary stimulus during the midst of a public health crisis simply won’t be fast enough. The impact on people’s wellbeing will be devastating.
If you thought that the Great Depression-era generation had unusual attitudes about many things, the scars from the economic side of this crisis alone would last decades. Let alone the enormous changes in societal behaviour that will be required to flatten the curve.