• Skyward Financial

Finance Market Update - 30 July 21

It is the second order consequences of lockdowns that should worry us the most. In this fortnights update we explore the repercussions from lockdowns beyond headline figures and ask what their true cost, particularly for business, might be.




Immeasurable true cost of lockdowns


The easy answer to the question on what the true cost of lockdowns is to look at the dollar figures and the debt amounts being accrued, but that fails to include the holistic impact they are having and the cost of that impact.


According to the Intergenerational Report released last month, by 2025 the governments gross debt is forecast to be $980 billion which is on track to be more than half of the country’s GDP a few years after that. This is well above the previous forecasts of $361 billion for 2023 and the increase is all attributable to new debt the government created in response to the virus crisis.


That debt is a huge cost that will need to be managed but it is not reflecting the total true cost we as a society and economy have and will continue to pay from the virus crisis and lockdowns.


The true cost, immeasurable as it is right now, is going to be far deeper and greater than the dollar figures will represent, and of the true cost there are two groups of people who will pay the heaviest price and be disproportionately negatively affected by lockdowns – small business owners and students.


Before we talk about those two special groups let’s talk about the macro picture.

Let’s also acknowledge that while lockdowns have huge cost, so does not having lockdowns. Neither is the best option; it is a choice of bad or worse.


Either way, Australia just like the rest of the world will need to learn to live with covid and its impacts, because it can’t be eradicated, and keeping people in their homes and borders shut over a long enough timeline will ultimately be the demise of any society and economy that tries.


Australia was for the most part lucky to avoid a pro-longed recession from last year when the virus crisis started.


The fortune of being an island, combined with cutting international flights early, meant we didn’t import the virus to the scale of other landlocked countries. On top of that ‘Team Australia’, comprised of the RBA, banks, politicians, and large corporates, came together with a coordinated, targeted, and effective financial band-aid for the economy.


They are the reasons we saw a snap back and fastest economic recovery on record.


Paradoxically but not surprising, property prices are likely to continue to boom regardless of any technical recession, this is due to the ‘five forces’ that I’ve outlined over a year ago when I predicated record high property prices.


This time around the luck and response to 2021 lockdowns is muted by comparison.

The delay from Team Australia, the RBA, government, has already been disastrous as all the rebound from last year quickly erodes as unemployment (forced or not), and confidence is sapped.


The main thing that saved us from a recession last time was the government quickly providing a backstop in the form of JobKeeper for people’s incomes, both PAYG and self-employed. This is really what enabled people to bunker down, save money and come out of their homes ready and roaring to go.


This time there is a lower floor in how low people’s incomes can go, meaning they can, and in distressing situations will, go to zero.


Even with financial support the singular issue of people not having ‘enough’ money will destroy consumption, spending and confidence. The very things that fought of a recession last time.


This begs the question – what is the true cost of lockdowns?


This question is unanswerable at this point in time but I’d suggest that over the coming years as data becomes more readily available and understood that the true cost will be greater than anyone thinks it is right now. The cost is also not singularly financial and it must include the human cost of lost livelihoods and lives.


Most of that cost is disproportionately and unfairly being shouldered by small business owners.



Small business big numbers


One person’s spending is another person’s income.


This is true for everyone but particularly true for small business owners.


Small business owners whose incomes solely rely on their customers and not an employer to pay their wages. The same customers who are under stay at home orders and who themselves will have their lives disrupted. The same customers who by being home will not be buying as much from the small business owner.


Thereby reducing the incomes of the small business owner.


There is roughly two and a half million small businesses in Australia. The backbone of the country as politicians like to refer to them as, the same people who the government has told to shut their doors.


Last year during the first wave of lockdowns there were two key financial support mechanisms available to businesses. JobKeeper to pay themselves and their staff, and ‘SMEG’ (government guaranteed) business loans.


Practically speaking neither is available now.


The government secured loans under the ‘SME Recovery Loan Scheme’ are widely unavailable because of the revised eligibility criteria. To get a loan now your business really has to be on life support, and not many lenders want to supply funding to a business in that situation.


Even when these loans were widely offered getting them was a headache, with banks having very long processing times, requiring a lot of documents and the non-bank lenders charging a lot more for quick cash. Now, these loans are essentially not an option for small businesses.


The other support mechanism from the federal government was JobKeeper and they have resisted calls to reinstate it and instead offered different support packages, which for the most part have been lacking so far.


Fortunately as Sydney passes the four week mark of lockdowns, with just announced month long extension, and the potential for rolling lockdowns till next year, the government has now offered increased weekly payments between $1,500 and $100,000 to small businesses.


Businesses will be able to get the money based on 40% of their weekly payroll. But the business is also not meant to let go of any staff. So they will have to reduce staff hours, which in turn would reduce the payroll, which in turn would reduce their financial support.


In one sense it appears the government is asking small businesses to burden 60% of the payroll cost and not fire any staff. A cost that will be too great for many businesses.


The lockdown and this financial support is speculated to cost the state and federal government about one billion dollars a week, time will tell if that is enough.


But as an example of how drastic lockdowns affect small businesses, only about two months ago we talked about record levels of business investment as the economy was firing on all cylinders, now, it is just a faint hum. Let’s hope this snaps back quickly after these new lockdowns.


One specific subset of small business owners that have been extremely disadvantaged in this lockdown were people in the construction industry.


The government shut down all construction sites for fears of the virus spreading at work and given many people from suburbs where there have been high cases work in construction. Those same people are most likely sub-contractors, effectively self-employed, whose income was immediately cut.


One could guess that many people at the Sydney protests had their incomes cut as a repercussion from the shut down of the construction industry. A pertinent example that when there is no backstop of people’s income they get on the front foot to rally.


However, times like this do allow some small business owners to work on their business not just in it.


In an update earlier this month we talked about finance options and planning that business owners can do to give themselves breathing room in just this scenario, you can read that here, and if your business needs capital Let’s Talk.



Zooming in on education


Other second order consequences in various industries could see our nation fall well behind its potential and even pre virus crisis trajectory.


Take education for example.


Over the past twenty years consistent policy failure and investment into the education of children in primary and secondary schools have seen the average reading, writing and math abilities decrease respective to children who were taught the same things two decades ago.


This means a kid at school now is likely going to have worse literacy skills compared to a kid from twenty years ago.


That is shocking and represents fundamental failures in policy, government, our culture, and us as a society.


But it gets worse, a lot worse.


Over the last eighteen months school kids have spent less than half the time they normally would have in a real classroom.


They have also spent countless more hours on Zoom / virtual classrooms which do not deliver the same educational experience, or most likely and importantly, learning outcomes.


This is of course because of lockdowns and the disruptions that brings, but the consequences of that, I think in many cases, will simply be a ‘lost year of education’ for many kids which will put them even further behind.


I would argue that the government should respond to this education crisis with the same amount of vigour that they have attacked the virus with.


Why should we lock the country down to largely protect the elderly and vulnerable (given average age of death is well over 70 years of age in AU) and not give the same effort to the young humans that are our future?


It is disheartening to think how many young kids will have a worse education now, not only from compounding failures over the past twenty years, but also because of the virus crisis.


As much as parents can try to juggle work, mental health, fitness, nutrition, and everything else, adding home schooling on top is often an insurmountable task to deliver the same level of education a teacher would in a physical classroom.


This is not parents’ fault and is more a symptom of how humans learn, in most cases the optimal learning environment is in a room with their peers, not in front of a screen at the kitchen table.


Unfortunately for the millions of kids who will inherit our post covid country, and all the debt, economic and societal issues that it will bring, they will likely have to do it with less education and investment from the same adults who have made and are still making mistakes.


Another future issue the same undereducated children will need to deal with is all of the debt created by the government in response to the virus crisis, effectively using money to solve an issue to largely protect the current older generations at the sacrifice of the future generations.


Dealing with that and other issues like climate change will cause huge disruptions in social discourse and equanimity.


In the end, when lockdowns are deemed (politically) unfavourable, counterproductive to (holistic) health outcomes, or (financially) suboptimal, by the government the majority of our country’s population will be legally able to venture outside, unfortunately for small business owners and children, they will still be paying more than their fair share for the true costs of lockdowns and the virus crisis.