The world is engaged in a vast and unprecedented experiment: what happens when you engage in a coordinated global shutdown of economic activity? Nothing like it has ever been done before. Anyone who claims to know how the post-virus recovery will play out is simply speculating.
But certain industries and companies have a better idea than others of how things will look this time next year when, hopefully, the virus is no longer a major threat.
Two weeks ago, Air New Zealand boss Greg Foran emailed staff to tell them, “clearly, we will be smaller for some time and we will need fewer staff,” and that “we expect that even in a year’s time we will be at least 30% smaller than we are today”.
Foran not merely runs a company that has been smashed by the virus; he is enormously experienced in customer-centric industries. He was foolishly passed over by the Woolworths board for the CEO role when he was the giant’s head of Food and Liquor. He left to work for Walmart, first off running the giant American groups’s Chinese operations and then was brought back to the US to lead Walmart’s biggest business, its US stores. He started the Air NZ gig early this year.
On the day of his email, Air New Zealand started cutting 3500 of the 12,500 people employed globally by the airline. The airline’s revenue had rapidly fallen from NZ$5.8 billion to around NZ$500 million. That’s 90%.
Foran knows there will be no v-shaped recovery for the aviation industry — and probably not even a u-shaped one. The entire industry, apart from air freight, is now closed internationally and severely curtailed domestically. Planes are being parked by the score.
When international passenger aviation is allowed to resume, the process will take time, and it will be patchwork, with countries identified as having defeated the virus ready to expand domestic aviation but still reluctant to open their borders to countries where the virus remains rampant. For example, surely no one should open their borders to Americans for the rest of the year.
Business travel is likely to remain depressed, especially if companies get used to remote working and teleconferencing and the lower costs it enables.
Tourism is unlikely to bounce back quickly, although the industry will drop prices to try to get people holidaying again (regional Australia, which is reliant on tourism and more economically fragile than urban areas, will take longer to recover).
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So you can see why Foran thinks his company will still be at least 30% smaller even 12 months from now. There’s no reason to think Qantas and Virgin will be any different.
However, airlines are atypical: there will be fewer impediments to other sectors re-opening. That’s one reason why overall economic indicators like GDP — which will show a huge contraction in the current and next quarter when the data are eventually released later in the year — aren’t that helpful in assessing any recovery: different sectors will face different challenges.
The removal of lockdown restrictions will likely see cabin-feverish consumers flock to cafes and restaurants and pubs, eager to finally socialise again.
Many hospitality businesses probably won’t reopen again, their owners having been wiped out by the shutdown. But others will take their place.
There’ll be less money for discretionary spending in households but there’ll also be an employment surge as the hospitality and retail sectors put stood-down staff back to work and start hiring again. The “siege is lifted” feeling will inject life into the economy again.
Some sectors like manufacturing, will have come through relatively unaffected or, in the case of supermarkets, thrived.
The biggest employing sector of the economy, health and social care (especially the NDIS), will likely emerge from the crisis as even more dominant as our single-biggest employer.
But overall, the capacity of business to start up investment again will be limited by balance sheets smashed by the crisis, with capital reserves run down and debts run up, limiting any expansion plans even with tax concessions to encourage spending.
Much will depend on the ongoing psychology of the community.
Remember, things were fragile before the crisis, and households have struggled for years. The government’s ability to engender confidence will be hamstrung by the colossal debt it has, correctly, amassed to get the economy through the immediate crisis. Once it has passed, the fiscal pressure will be on to find ways to curb spending and increase revenue to start paying down a net debt that in excess of 30% of GDP.
The next round of tax cuts, despite government assurances, now look problematic.
Our biggest defence project, the $100 billion (and counting) Franco-Australian submarines, must surely be scrapped or delayed. Tax lurks for wealthy older Australians of the kind Scott Morrison defended to the death at the last election are back on the agenda, even at The Australian.
One driver of that will be the fact that, as Wayne Swan found after the immediate threat of the financial crisis had passed, revenue from company tax is likely to be lower for an extended period.
We may also lose our triple A credit rating. But the debt:GDP metrics of every AAA-rated economy (even Germany and Switzerland) will rise now. And in any event, with interest rates low for years to come, the cost of debt will not a major burden.
Governments will also have two difficult decision points that will bear on how quickly we recover: at what point do they begin easing restrictions and allowing people and business to start moving again? And what happens if the virus flares up again? Do lockdowns become a permanent part of life until a vaccine is perfected and distributed?
The other point is when to cut off the current stimulus and survival packages.
These are designed, rightly, to be temporary. But the federal government will face a tough call in August about continuing the JobKeeper payments if unemployment is in double digits and there’s no sign of lockdowns being lifted. Any decision about cessation will end up disadvantaging some businesses and workers, but it can’t be open-ended.
The best-case scenario is that the virus is defeated in a couple of months and we can start sitting in the winter sunshine in cafes across Australia as the third quarter begins. But as people like Foran know, the reality is likely to be longer, more difficult, and far more uneven than anyone, including many in business, realise.