March 2020 Chairman's Newsletter
March 2020
Chairman's Quarter Newsletter
The Economic Impact of the Coronavirus Shock
Bad News Comes in Threes
We are facing three economic shocks:
1 - the stock market bubble, which climbed exuberantly across a long period of slow GDP growth, finally went pop.
2. - That pop came via the Oil Wars clash when Russia didn’t play ball with OPEC, and we saw the barrel price nosedive to below $25 US a barrel. That was the second shock.
3.-. Shock number 3 is the Corona virus, or COVID-19 itself. and this has the makings of a global Godzilla.
Australia’s last three economic downturns
Many commentators are already comparing the beginning of the COVID-19 shock to the Global Financial Crisis (GFC). This is not an apples for apples comparison. The 90/91 recession is a much better comparison but COVID-19 will be much worse than even that deep downturn.
What were the features of the 1990/91 recession? Unlike the GFC unemployment hit 11.2%, GFC barely hit 6%. The 1990/91 recession saw median house prices decline in Sydney and Melbourne for three years with massive bargains on offer if buyers were cashed up. Bank Mortgagee auctions were rife. In the GFC although property prices declined by some 5% they rebounded strongly by 2010.
Figure 1: Australia’s Unemployment Rate Across the GFC and 1990/91 Recessions
The COVID-19 virus will bring a major economic downturn, perhaps lasting for three quarters, all with negative GDP. In Australia the11th of March saw some two dozen notified COVID-19 cases. As at 24th of March there were 1887 cases, exhibiting an exponential growth rate across those 13 days. Although the Reserve Bank of Australia has cut rates twice in March 2020 we have seen a small downturn in Melbourne and Sydney’s auction clearance rates. However, despite the RBA cash rate cuts will buyers sit on the sidelines and watch a property downturn as was the case in the 1990/91 recession? It will be almost certain that the COVID-19 effect will have an impact on property prices. On unemployment: unless there is a definitional change for being ‘stood-down’ unemployment will be worse than the 11.2% level of 1990/91 recession that peaked in 1993. This will be across the board hitting hard: passenger airline travel, the retail sector, the entertainment sector, elements of manufacturing, education, casual contracting, consultants, conferences, tourism, real estate agencies and financiers. The food sector will hold up although restaurants will be initially hard hit.
Passenger Airline Services and Tourism
International passenger aviation has been severely impacted. Over the last two weeks international aviation has been cut massively with travels bans being activated across Europe, the USA and Australia. Qantas has ceased international flights and cut some 60% of domestic services. Other domestic passenger demand for Airlines will also be tested as some Australian States are now requiring 14 days of self-quarantine after arrival. This will also put pressure on regional airline services. Both the reduction of domestic, tourist and business travel have had a crippling effect with some commentators suggesting bankruptcies may eventuate. Tourism in some States also suffered significantly because of the four months of raging bushfires that hit many coastal tourist destinations.
Cruise Liners
The large passenger liner industry will grind to a halt in the coming weeks. The case of the Diamond Princess, docked in Japan, saw the vessel being a very effective incubator for the COVID-19 virus. The 3700 passengers and crew were moored at the Port of Yokohama for two weeks. Some 542 of the passengers and crew were infected, some fatally. Special repatriation arrangements were made by several countries to return their own nationals. Since the case of the Diamond Princess, several cruise ships have sought passenger disembarkation at various ports. Some have been rejected and some successful. In Australia disembarkations were allowed in Sydney and initially a disembarkation was refused in Fremantle.
https://www.wired.co.uk/article/diamond-princess-coronavirus-cruise-ship-japan
International Shipping
The slowdown of the Chinese economy has resulted in a significant drop in shipping from and to China. Some Ports are seeing even more than 20% decline in container throughput and one commentator has suggested that continued manufacturing downturn, and a slow pickup, could result in a loss of 17 million TEUs of traffic. To compound this effect bulk oil tanker movements to China have decreased massively as the world’s largest oil importer’s demand has nosedived despite the massive drop in oil prices due to the Russia vs OPEC production war.
https://www.nytimes.com/2020/02/27/business/economy/china-coronavirus-shipping-ports.html
New Car Sales
New car sales have reportedly slowed to a similar level to that of 2011. New car sales are often thought of as one lead economic indicator as it is usually the next most expensive household item and also an indicator of corporate health given corporate fleets are very significant new car buyers and lessees. As vehicles are a major expenditure item, a confidence dip as seen with looming unemployment will see at best stagnation in the new vehicle sector. Truck sales are below 2018 levels but the March quarter 2020 levels are expected to fall despite the interest rate cuts.
https://www.caradvice.com.au/817278/vfacts-2019-new-car-sales-results/
Construction
A centrepiece of the Australian Federal government’s GFC focus was the construction industry. With this COVID-19 shock the federal government has been moderate in its support of this sector. During the GFC expenditure in the educational construction sector reached nearly $7.8 billion alone.
Figure 2: Where the construction money was spent during the GFC
Conferences and Sponsorships
With reduced international and domestic travel, and the prospect of serving out 14 days of self- quarantine the conference sector has faced a massive downturn. Already we have seen the Australian Trucking Association conference cancelled, the Australian Logistics Council deferred and CILT-Australia’s international conference deferred to June 2021. Needless to say the supporting sponsors have either dropped out or deferred sponsorship to the following financial year.
Consultants Beware
Both the 1990/91 recession and the GFC saw a massive hit to the consulting markets. During the GFC, just as an example, Macquarie Bank’s share price dropped from $99 to around one third of this price, resulting in almost an equivalent percentage of staff being retrenched at this time. Government contracts shrunk and many transport planning, infrastructure and transport economic consultancies downsized, during not only GFC, but also 1990/91 recession as government wound back spending.
The Food Sector
The one sector that not surprisingly held up during the GFC was the food sector. Already in the first few weeks of implemented COVID-19 restrictions and community policy changes Australia has seen the dash to the supermarkets raise revenues for all the major supermarkets and even a 15% jump in revenue for the Reject Shop, perhaps via its cleaning range of products as well as its food lines.
Home delivery will see boom demand as carefully delivered take away meals to households will experience very significant growth. This is especially true as restaurants and sitdown eateries have been ordered to close in most States as a COVID-19 avoidance and safety measure.
Road Freight
Road freight in Australia has been defined as an ‘essential service’ and as such should not be disrupted by cross State border self quarantine regulations. Discussions have also been had that a raft of costs may be waived in the medium term. These range from Enterprise Bargaining being put on hold, registration fee increased being deferred, and even tollway charges being frozen. However, despite FMCGs and reefer trucking holding up in the GFC the road freight sector declined by some 6% during the GFC, and in fact remained weak for some 7 years after the GFC.
How Low can it go?
In June 1929 the US DOW JONES Index hit a peak of 5134 points. It took 3 years to tumble to 814 points in June 1932, a drop of 84%. This was the Great Depression. Our All Ordinaries Index dropped from a high in February 2020 of 7308 points to the current 23rd March level of 4649 points, a drop of 36.4%. Without a vaccine the All Ordinaries too will also continue to be virally impacted.
