The impact of the Covid-19 crisis continues to grow as businesses are increasingly forced to close their doors and send employees home to slow the spread of infection. The financial impacts on both employers and employees promise to be debilitating, both in the short and long term. To head off potentially devastating long term problems, the government has already passed a $17.6 billion economic stimulus package. Governments around the world are taking similar measures, though it’s clear that far more will be required in the coming weeks and months.
As companies continue to lose business, workers begin to lose their jobs, and consumer incomes dry up, the economy will grind to a crawl. Unfortunately, this kind of slowdown is not easily reversible. In order to make it through, and then to recover, businesses will need substantial financial support.
Coronavirus is visibly driving the economy into recession
Business closures are currently still mostly being termed as “temporary shutdowns.” However, if the current situation continues for any significant period, those shutdowns are likely to become all too permanent. Most businesses operate with a significant amount of debt, and need to manage other monthly costs such as equipment leases, rent, and wages while earning little or no revenue. This is inherently unsustainable, as businesses often can’t sacrifice a week, much less several month’s worth of revenues without going bankrupt. Modern business operations are generally very lean, relying on financing to manage even relatively minor cash flow interruptions, rather than holding on to emergency funds. This allows them to operate very efficiently and competitively, however doesn’t leave much financial wiggle room to absorb massive losses.
Already, large and small businesses all over the country are beginning to go into administration, leaving their employees jobless. These are then taking on their own debt or spending typically meager savings to cover their costs of living. As the situation develops, more and more consumers will restrict their purchases to essentials, eroding demand for many of the goods and services that have kept the economy growing over the past decades.
Recovery is not as simple as going back to work
When restrictions are lifted, many surviving businesses may find that their markets have shrunk or disappeared outright. This is, in effect, the vicious cycle that defines recession. In order for businesses to recover, consumers first need to have the means to buy goods and services, and they won’t have these if they don’t first have the necessary income.
Traditional funding sources are unlikely to provide relief
Traditionally, businesses would turn to lenders and investors for financial support during tough times. However, deteriorating conditions are making investors more risk averse, leading to a dearth of available funding. At the same time, businesses are losing contracts and customers as their stock prices plummet, often leaving them unable to access credit as a way to deal with coronavirus-related costs. Governments are cognizant of this, and are moving to step in.
Governments prepare to take drastic steps
A week after passing a $17 billion stimulus package, the Australian government is preparing to issue a second-round “safety-net” package. This will provide income support to individuals, as well as urgent financial support for businesses that have been affected by the coronavirus. To appreciate the likely scale of this and future stimulus packages, we can look to the stimulus measures being discussed in other countries. The US government is working to pass a $1 trillion USD aid package, approximately equivalent to 5 per cent of the US gross domestic product, half of which will go to cash payments to citizens. This is because 4.6 million Americans are currently projected to lose their jobs in 2020, and many more will receive no paid leave if they aren’t able to go to work due to coronavirus restrictions or illness.
The UK, Germany and Spain have already taken even more aggressive measures, with stimulus packages valued at approximately 14 per cent of GDP for the UK, 16 per cent for Spain and Germany. At the same time, central banks are slashing interest rates, as tax offices offer tax relief and deferments.
Despite the massive efforts by governments in Australia and around the world so far, stock markets have continued to tumble, erasing years of growth in weeks. With large portions of the world economy keeping its doors closed for an indeterminate amount of time, there is little to buoy consumer or investor confidence. To protect their interests businesses will ultimately need government support, a clear date when they can return to work, and direct financial aid to help drive recovery.