Podcast

No such thing as a quick recovery

Said Jahani Said Jahani

If the government’s economic outlook last week tells us anything, it’s that we need to be realistic about the Australian economy.

When the GFC hit in 2008, trade slowed down but as a nation we were able to avoid a recession. The Government threw stimulus at the challenge when access to capital dried up. This time around, there is no avoiding a recession – and given the numbers touted last week, perhaps even a depression. However the Government, Reserve Bank of Australia and financial institutions have banded together to ensure there is liquidity in the market to help keep the gears grinding. It’s a different kettle of fish.

In this podcast, Said Jahani, National Managing Partner of Financial Advisory, discusses what happens when the ‘sugar hit’ of government stimulus and early access to superannuation currently swirling in the economy dissipates, and what he hopes the Australian economy will look like in five years’ time.

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Podcast transcript

Velvet-Belle Templeman

Welcome to Boardroom.Media.  I'm Velvet-Belle Templeman, and you're listening to Grant Thornton's Navigating the New Normal podcast series.  Today I’m here talking to Said Jahani National Managing Partner of Financial Advisory at Grant Thornton.  Said specialises in turnaround and corporate restructuring and is here talking about the state of the Australian economy.  With the Federal Government handing down their economic statement last week, including revisions to a new, more targeted version of JobKeeper what does this say about Australia's recovery out of an economic recession? 

Thanks so much for joining us again, Said. 

Said Jahani

Thanks for having me.

Velvet-Belle Templeman

Now Said, the update from the Treasurer last week wasn't good.  We're facing the biggest deficit since World War II.  Unemployment rate is heading to 9.2% by December.  We're already seeing parts of the country declared as hotspots and locked down.  What does this mean for Australia's recovery out of recession?

Said Jahani

I don't think we're looking at a V-shaped bounce and when you see second outbreaks and lockdowns, like the one in Victoria, it is really difficult to see how we can recover from this really, really quickly.  Let me explain what I mean by that.  So most people know that the definition of a recession is two consecutive quarters of negative GDP, and we have that.  So we are in recession and everyone knows that.  Even during the GFC, we managed to actually avoid the technical definition of recession.  So you'd have to actually go back some 30 years, back in 1990/91, since the country was actually in a recession.  What most people don't know is what the definition is for a depression and whilst there’s some conjecture around this, it's broadly accepted that the definition of a depression is two consecutive years of negative growth and that is what the Treasurer outlined last week.  The estimated GDP will shrink by half a percentage in the FY20 financial year and then will shrink again by 2.5 per cent in the current financial year, 2021. 

Now the government’s response package totals some $174 billion over the next couple of years, plus balance sheet support.  I mean, if you think about it, it is literally throwing the kitchen sink at this problem to try to solve.  And now on top of that, you see state and territory governments also announcing their own separate relief packages.  Plus, you have early access to superannuation both last financial year, $10,000 per member, and this current financial year, $10,000 per member, which has also injected another $100 billion dollars into the economy.  Add all that together, there is a lot of money currently swirling around the economy, and that will stay around for the short term.  When I'm actually speaking to many businesses at the moment, yes, they took a hit during the first lockdown and for those unfortunately enough must now face a second lockdown in Victoria have taken another hit, but those who have come out of it are actually rebounding reasonably quickly, even in states that have had the biggest hits, which is tourism and hospitality.  There is pent up demand and thanks to the stimulus and the access to super consumers still have cash they want to spend. 

So in my mind, the bigger issue around the recovery is what will happen when all this sugar hit and this money that's been swirling around currently runs out, which I think will occur in the next six to 12 months. and that's where I think the treasurer has obviously forecast the depression.  The key factor around that is that the recovery will take longer and be harder.

Velvet-Belle Templeman

So clearly this particular recession is different from previous ones.  And am I right in saying that if not for the pandemic, we wouldn't be in a recession.  What's the sentiment like in the business community?

Said Jahani

Yes, I think you're right, and we'd been growing moderately as a nation around about 2.5 per cent GDP.  I think we were forecast to do the same again in the current financial year, we've just come into.  Obviously, the closest thing that we've had to a recession in recent times is the GFC some 12 years ago, however, the GFC was characterised by a significant absence of credit availability where financial institutions were reluctant to lend to each other.  And then that had a knock-on impact to businesses who were then starved of capital and liquidity.  The government's tried to address this early on in the current pandemic by providing its balance sheet to support liquidity to businesses via the banks, as well as working with both APRA and the RBA to relax some prudential regulations to again, encourage banks to provide ongoing liquidity.

I mean, in my mind when I look at the differences between say, the GFC and the current crisis, you know, yes we saw some large financial collapses during the GFC, think of Babcock & Brown and Allco, just to name a couple, but most of these collapses didn't actually impact the average consumer or business.  So after the fallout from the GFC, whilst it was significant, it was reasonably limited.  Whereas in this case, given the health crisis that has gone hand in hand with the economic crisis, there's not one single consumer or business that will be left untouched from this crisis and as a consequence, the ensuing economic crisis.  So because of that more far reaching impact, I think, as I said before, the consequences will last for a lot longer and take a lot longer to also come out of the other end.

Velvet-Belle Templeman

And Said, compared to what we're seeing in other countries, how do you think Australia is faring in balancing health and economy?

Said Jahani

Look, it's not an easy job, you know, in terms of what the government's got to do here.  My assessment, I think, they’ve done a reasonably good job.  The government has come out quite early on and said that they would not pursue an elimination strategy in relation to COVID because economically it just would be too dire for the country to try to do that.  So it had to always balance the opposing forces and I think most businesses have had a similar challenge.  So look, I think, you know, especially when you look at yes, there's the second outbreak, but if you look at our health mortality rates and infection rates, we are still well below a number of other developed countries in the world and our economy hasn't fallen off a cliff in the same way others have where they've taken the more dire approach of complete lockdowns and shutdowns.

In fact, when you think about Josh Frydenberg's presentation last week, he compared Australia to countries like France, who did go down that hard lockdown and have got a bit of buyer's remorse where I think he quoted the French President saying they would not go down that path if there was a second outbreak again.  Probably the only other thing I'd add is there are some examples in countries like Denmark, you know, who did adopt benefits to employers to retain and continue to pay their workforce rather than make them redundant, but they linked some of those payments to retraining and education campaigns as well.  So rather than employees being paid so to speak, you know, to watch Netflix, you know, over a period of time, there was a requirement for them to reskill or up-skill, or do more education to try to create an incentive for further productivity and efficiency gains in the long term, which, you know is not a bad idea when you stand back and look at it from afar.

Velvet-Belle Templeman

Now it's been made clear and it was made clear again last week that the number one priority for both state and federal governments is to create more jobs.  How do you do that when you're dipping in and out of lockdown?

Said Jahani

It's not easy and the government has flagged this issue.  You know, my first, second and third answer would be creating more flexibility in that industrial relations framework.  You know, the first thing most employers want to understand is at the moment, whether the current temporary changes that were introduced when JobKeeper was first announced to our industrial relations laws will be extended past their September, expiry.  These were the changes that increased flexibility around how employees can stand down parts of its workforce, reallocate job descriptions, job roles.  And when I speak to a lot of businesses, those changes, and that flexibility has been just as important as a number of the other initiatives that the government introduced over that time.  Having said that it is obviously only a band-aid, and you might recall, with a bit of fanfare, the government announced a reform agenda on the IR framework about a month ago, which would involve a collaboration between both sides of politics, the trade union movement, business groups.

But we haven't heard much more since that big announcement and I’m obviously keen to understand how this develops sooner rather than later.  And then perhaps another way to think about how else the government can look to create more jobs.  If I just take an industry lens to that question, I just picked two sectors.  And again, in fairness to the government, they have already earmarked both of these sectors for support, but they are infrastructure and construction, both have large capacity to create jobs.  So if you think about construction and the multiplier effect from investing in the construction sector is massive as it ripples across multiple sectors across the economy from, if you just think about, you know, building a house from the raw materials, the professional services and the retailer you need at the end of that supply chain to furnish that house.  It has, as I said before, this massive multiplier effect, similarly, on infrastructure from a productivity perspective, the efficiency gains from having a strong infrastructure agenda are massive.  Now we've underspent in that area, across the nation for decades.  And, you know, we are, at a roaring pace trying to catch up as a consequence, but as I said, the benefit of increased efficiency and productivity for the economy from investment into infrastructure, will, I think also play an important role in our recovery.

Velvet-Belle Templeman

And Said, will the jobs be the same as they were before?  Or has the pandemic highlighted some gaps or opportunities for new roles and services?  Where are the bankers and lenders placing their bets?

Said Jahani

Look, I think a lot of businesses will eventually see a return to normal or what I call a new normal which will be a matter of time.  The new normal is, yes, we will return to a level of trading, not dissimilar to pre-COVID, but depending on what sector you're in and you operate in, you know, it may stabilise at a level below or above where you were pre-COVID depending on the circumstances.  So, the best example that a lot of businesses perhaps can relate to and I'll put my hand up as well in this category, you know, you might jump on a plane to go from Sydney to Melbourne for a two or three hour meeting face to face, and then jump back on a plane or stay the night and come back to Sydney.  Now, I think we've all learnt through the lockdown that with the benefit of technology, a lot of those meetings don’t need to happen face to face and there always will be some that need to happen face to face.  But, you know, you can actually run a lot of those meetings using technology.

So there will be a new normal around some of that sort of stuff, which will affect aviation, transport, restaurants, accommodation, but by the same token, you know, there are winners.  And if you talk about where would I be putting my bets?  Well, let's look at some of these technology providers who have provided a massive, and played a massive role in helping facilitate business during the lockdown.  So whether that's things like Zoom or Teams or Skype, there's been a massive role for technology usage and then, you know, the consequent hardware that goes behind that.  Similarly, if you talk to retailers, yes bricks and mortar have taken a hit, but most retailers have seen a massive spike in the online.  So, you know, there are investments going into those areas and that's probably where, you know, there'll be more job creation.

Velvet-Belle Templeman

And finally, we’re a bit over four months into the pandemic now with no real way of knowing how long things will last, but where would you hope to see the Australian economy in say five years' time?

Said Jahani

I would well and truly hope that we would have fully recovered from this crisis if the economy can, by that stage, be back to, or slightly above where it was pre COVID-19 from a growth unemployment perspective, then I think that will be a success.  We will still be stuck with an overhang of debt, which it will take time for us to pay off, that's from a government perspective.  But also, I think from a business perspective.  Businesses may be in the same situation having had to borrow to increase their liquidity and their buffer as a consequence, they may still be repaying the last remnants of that additional support back.  But the government have made it clear,  it wants to grow its way out of this crisis, which in my mind means no more tax hikes to try to repay back the borrowings.  I think that that's the right approach by providing more incentive for businesses to invest and giving them the confidence to invest and grow, that's what will create jobs and hopefully profitability and that is the way for the government to increase its tax take in a more efficient manner, as opposed to increasing just marginal personal income tax rates or corporate tax rates.  In fact, that's how Grant Thornton is approaching the future as well.  We want to grow our way through this and help our clients in the process. 

Velvet-Belle Templeman

Said, thank you for your time. 

Said Jahani

No problems.  It's been a pleasure.

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