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More support as more shuts down

While, there is a lot we cannot do, we hope our regular communication is useful.

As the situation is changing so rapidly and we are expecting an even bigger third stimulus package any time, we are trying to keep you as updated as possible. We are also waiting to see what restrictions come next.

For most people what is going on is confusing and scary. Sometimes greater understanding can help.

Economic Policy

What does Scott Morrison mean when he talks about “putting the economy into hibernation”?

The objective is to hit the pause button. For a business, this means that if your revenue has ceased, your costs must cease or at least not come due during the period the economy is on pause. They also changed some laws about insolvency to give businesses room.

The main costs that cannot be just stopped are:

  • Bank debt – Dealt with through RBA and government policy in coordination with the major banks and banks will not foreclose on people who lose their jobs as a result of the Cov19 disruptions;
  • Rent – Deals are being made all over the place between landlords and tenants and this entered another level when Solomon Lew, Australia’s largest retail tenant through Premier Investments, said they were shutting all stores and would not pay rent. This is unheard, even for Solly and the government is clearly in the corner of tenants. It appears the best that landlord’s can hope for is land tax breaks and bank support. The government is saying landlords need to share the pain. Some property trusts have seen big falls, but even if you lose one year of rent, value does not drop to the levels we have seen.
  • Employees pay – There were times when a business could be very unhappy with an employee’s contribution and would have to go through a labyrinth of regulation to fire someone. Now it seems that you can stand anyone down at a moment’s notice. This is to stop businesses going bust. We do not have details, but the government is going to announce that they will pay 70%+ of the wages of employees of businesses that have to shut doubt or have been severely hit, up to a limit most likely around average pay. This is an economic policy and it is more about business and the economic rebound we can eventually hope for, than trying to support employees.  The major objective is to be able to retain key employees, so the business will be in a position to get up and running again.

We need to be clear, the primary goal government wants to keep businesses alive and as well as possible, during the hibernation, so they can employ people and drive the economic recovery.

The main plan for individuals is bank support for mortgages (will not foreclose), the higher unemployment benefit. The wage subsidy may not turn out to be that much more costly that the doubled Newstart payment in many cases. However, it is another action that would have been unimaginable just over a month ago.

Will the rebound be strong?

As the disruption has been so great, the drop will be unseen in history and the rebound has to be steep, but there is plenty reason to doubt that it will return to normal quickly. No one can say. There are just too many unknowns. Will there be a WWII surge, will there still be too much disruption, maybe people will still be too scared to go out and spend? We hear some people saying we should be very worried, as the economic rebound might not be as strong as we hope. This is the thinking on a vacuum approach that never ends up be an accurate prediction.

The other side of this equation is that the stimulus will not be all removed at once. They will watch what is going on and make adjustments accordingly. Why would they bet the house on supporting business and the economy, to pull the rug from underneath when a bit more is needed.

We have some comments on the way they report the Cov19, which is very frustrating if you have a strong understanding of statistics, but we will leave that for another time.

If you have any questions or require any further information, please contact our office on (03) 9629 1100.

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