Second Page of the COVID-19 Diary: Business Insolvencies, Unemployment, Underemployment

Summary

• Victorian government imposed stage 4 restrictions across Melbourne, with Stage 3 constraints in regional Victoria could result in almost 250k job losses
• The shutdown will make many sectors come to a standstill temporarily or operate on a significantly reduced basis.
• CBA data suggests that card spending in Victoria was down by 5.8% in the week to 31 July compared to a year before, reflecting the impact of stage 3 lockdown.
• Unemployment is expected to rise to 10% by this year-end due to job losses in Victoria, and more people would be searching for work, as per RBA.
• Business insolvencies, unemployment and underemployment are likely to increase, with the government being urged to increase economic support instead of withdrawing it.

The Premier of Victoria Daniel Andrews declared new restrictions to limit the spread of coronavirus outbreak in Victoria and stated that the second lockdown could result in almost 250,000 job losses as a consequence of entire sectors freezing temporarily or to operate on a substantially reduced basis. He announced a shutdown of several businesses in the city by imposing Stage 4 lockdown for 6 weeks until 13 September.

As of 5 August 2020, the total number of coronavirus cases in Victoria stood at 13,035, and 162 deaths.

Under Melbourne's latest regulations, hairdressers, call centres and other shopping businesses will have to shut down, while restaurants, grocery and wine shops, petrol stations, drug stores, newsagents, pharmacies, post offices, newsagents, and maternity supply outlets are to remain open. New regulations have been placed on hardware, building and garden stores, and the construction sector would be having stricter restrictions on sites, functioning with limited staff members.

Further, Warehousing and distribution centres will be restricted to no more than two-thirds of their usual personnel onsite at one time. Meatworks would be forced to cut their production by one third, clothe staff in full Personal Protective Equipment (PPE) and there would be implementation of workplace temperature controls across all slaughterhouses across the state.

About 500,000 people have already been working from home across all industries, and about 250,000 had been stood down since the pandemic started. Though affected companies can obtain compensation of up to $10,000, and current payments from JobKeeper and JobSeeker would continue to be offered to interested individuals, but the assistance will fade when compared to the loss that has occurred.

Prime Minister Scott Morrison on 3 August proposed a $1500 coronavirus disaster payment for Victorian employees who have to self-isolate, and do not have paid sick leaves or receiving any payments via JobKeeper and JobSeeker programmes.

Spending and businesses to suffer amid lockdown

The imposition of Stage 4 restrictions in Victoria has shattered all hopes of economic recovery from COVID-19. As per Commonwealth Bank, card spending for the week ending 31 July was 3.2% higher than in 2019 compared to 9.8% gain a week ago after taking into account stage 3 lockdown in Metropolitan Melbourne, but not stage 4 lockdown.

However, CBA card spending in Victoria was down by 5.8% in the week to 31 July amid stage 3 lockdown compared to a year ago. Most robust annual spending gains occurred in Tasmania (+18.8%), Western and South Australia (both up by 11.6%) and Northern Territory up by 10.3%.

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CBA economists anticipate a profound impact of Stage 4 restrictions on consumer spending in the state.

A recent ANZ data showed that spending has contracted by 11%. As a consequence, cash balances are projected to dry up for companies, and the likelihood of insolvency would increase. However, the bill is expected to be even more significant when weak industrial growth pulls the wider national economy down and sets the floor under unemployment.

Oxford Economics experts stated that the Victoria restrictions would slow down the revival of the labour market and drive the economy in the direction of a drop in production in Q3- indirect spillovers are likely to occur in the supply chains and belief of businesses. The first state which is expected to witness confidence to disappear will be New South Wales, where worries about Victoria has already confined people to stay at home.

Unemployment rate likely to rise

Philip Lowe, RBA Governor, stated that while charting the economic outlook is challenging amid COVID-19, the bank anticipates unemployment to increase to around 10% by the end of 2020 because of job losses in Victoria and more people seeking work in different parts of Australia. The unemployment rate is expected to fall gradually to nearly 7% over the next couple of years.

About 2 weeks prior to strict restrictions being placed in Victoria, Treasury had projected a jobless rate of 9.25% for the year-end versus 5.1% before COVID-19 pandemic.

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Gareth Aird, CBA Economist, stated that the Victorian economy accounts for 25% of the country’s economy, which implies that GDP forecasts and employment will definitely be affected. Stage 4 restrictions imposed in Victoria have worsened the national economic outlook. He also added that the number of people who are getting JobSeeker rose in July and is likely to increase more in the next 2 months.

CBA predicts employment will fall by about 120,000 in Q3 across the nation. The rate at which the unemployment rate would rise remains contingent on the participation rate, which is expected to fall after stage 4 restrictions.

While RBA has forecasted economic activity to shrink by 6% over 2020, CBA has forecasted GDP to contract by 4.2% in 2020 compared to 3.8% earlier.

There will be some severe consequences arising out of lesser economic activity and unemployment along with an effect on many businesses due to Victoria lockdown. Hence, many economists have been urging the federal government to increase fiscal spending rather than cut it and provide greater support to workers and businesses.