How will COVID-19 affect Australian businesses and the economy?

The facts based on research.

You’ve probably received countless articles about COVID-19, here’s what we believe are the facts:

Fact 1:

For every 100 people that contract the virus:

  • 80 will recover with relatively mild symptoms that don’t require more than basic care,
  • 20 will require hospitalisation,
  • 5 will end up in intensive care, and
  • 1-2 will die as a result of the disease.

This assumes the sample group all have access to quality medical facilities and is representative of an average population.

Fact 2:

These figures in “Fact 1” change when a country has an aging population or when a country fails to stop the spread soon enough such that hospitals get overwhelmed. The death rate is also significantly impacted by the amount of testing. The more widespread testing is, the lower the apparent death rate, as the death rate is reported as a percentage of those that are confirmed to have the virus. Italy failed to act quickly to ensure the virus didn’t spread and they also have an aging population. The result is a catastrophic death rate of over 10%. However, Italy’s testing regime is poor so in fact the death rate albeit high, is probably much lower than the reported rate of 10%. The speed of the spread is determined by how quickly a country adopts isolation measures, which is determined by their political system, their political will, the capability of their public services, such as police, health system, and military, and a range of cultural factors.

Fact 3:

The total number of cases confirmed in any geographic location is less important than the growth rate in daily cases measured over several days.

Fact 4:

According to the Doherty Institute, media reports that suggest a vaccine will be available in 12-18 months are possible but extremely optimistic.

Fact 5:

Australia (unlike Spain, Italy and the US) has so far done a good job at containing the spread of the virus. Our health system is robust, and our public services are world class. We are also an isolated country, with large distances between major cities, putting us in the perfect position to control the virus.

However… unlike previous global economic meltdowns which Australia largely avoided, such as the GFC, the Asian Financial Crisis, and the Dotcom Bubble, we won’t escape economic upheaval this time.

Here’s what we believe is the likely fallout for the Australian economy:

The economy:

  1. Australia will go into recession, causing a significant rise in unemployment. Certain industries will be less affected such as health, food and produce, logistics and telecommunications. Some will be affected in the medium term, and a few industries such as airlines, education, and tourism will be significantly affected and have a much longer recovery period.
  2. Equities markets (such as the ASX), which at the time of writing have started to recover, will likely have a second downturn. The steep initial decline we’ve already had was caused by fear. It’s likely we’ll see another sell off once companies start downgrading earnings outlooks and start raising capital or receiving bailouts that will be dilutive to existing shareholders.
  3. Once the 6 month moratorium on mortgage repayments ceases and unemployment remains high, we’ll start to see mortgage stress for many homeowners resulting in a decline in house prices. Smaller numbers of tourists will encourage owners of holiday apartments to advertise to permanent tenants, increasing rental supply and a lower number of foreign students will reduce demand for rental accommodation. These factors added to high unemployment will result in a soft rental market.
  4. While the issues causing the downturn in the economy are not systemic, economic recovery will be slow and will not return to pre-pandemic levels for at least 18 months. The time frame will be longer if our big trading partners like China and the US aren’t successful in containing the virus in their own countries.

To understand what businesses can do at an individual level to succeed, here are some lessons from McKinsey and Company’s report on businesses that thrived compared to their competitors during and immediately after the GFC (termed “resilient businesses”):

  1. Resilient businesses moved harder and faster to cut costs and improve productivity during the early stages of the GFC. They reduced operating costs at a rate of 3x higher than similar businesses.
  2. Resilient businesses focussed on preserving growth capacity so they could kickstart growth activities sooner than competitors once the recovery began.
  3. Resilient businesses sold assets at a rate of 1.5x more during the downturn than competitors.
  4. Resilient businesses acquired more during the recovery at a rate of 1.2x, compared to other similar businesses.
  5. Resilient businesses focussed on maintaining key relationships with suppliers and customers during the downturn through regular communication, so they had built up increased goodwill which aided them in the recovery.

Australia is about to go into the worst economic period we’ve had for decades. Those that are fast to adapt will survive.

 

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