Record deficit but some early signs of recovery

The Treasurer and Prime Minister have both stressed that today is not a mini-budget.

It’s an economic outlook with Treasurer Josh Frydenberg and Finance Minister Mathias Cormann setting the tone for the current Australian and global economic outlooks.

Minister Cormann has said there are some positive early signs that the unwinding of containment measures in the latter part of the June quarter has led to a noticeable recovery in activity and jobs.

Household consumption is expected to lead the recovery with strong growth in the September quarter, while business and dwelling investment is expected to recover more gradually.

A five-year economic plan will be released in the Federal Budget in October, which will include the full four years of forward estimates.

The numbers:

• Federal Government has deployed $289bn in fiscal and balance support, the equivalent of 14.6% of GDP.
• Two successive deficits, $85.8bn in 2019-20 and $184.5bn in 2020-21.
• Net debt $488.2bn at 30 June 2020 and $677.1bn the following year.
• Tax receipts are down $31.7bn in 2019-20 and $63.9bn in 2020-21.
• GDP contracted by 0.25% in 2019-2020 and is expected to contract by a further 2.5% in 2020-2021
• Unemployment to peak at 9.25% in the December quarter – with the official unemployment rate and effective unemployment rate expected to converge as the year goes on.
• The numbers would be substantially worse, had it not been for the level of government support – unemployment would have peaked at over 14% and Treasury was contemplating a GDP contraction of more than 20% in the June quarter.

The good news:

• We are one of a few countries to maintain our AAA credit rating.
• IMF has singled Australia out as the only developed country to have their economic outlook upgraded this year.
• Borrowing costs are at a record low, increasing the affordability for the government to borrow to fund its relief package.

At a State level, each week our communities have to spend in lock down or with restrictions compounds the cost and puts pressure on businesses to survive. In fact, Victorian Treasurer Tim Pallas also released their own fiscal update in the face of a minimum six week lockdown today, with the State’s economy expected to contract this year for the first time since the 1990s. Gross State Product (GSP) will be roughly $23b lower this year than the last. There are many layers to work through.

So what does this tell us about the state of the economy?

If we take the GFC as being indicative of what we can expect (bearing in mind we have a health crisis precipitating the economic crisis) then we know it can take many years, perhaps 3 to 5, before companies are comfortably back at pre-COVID levels.

The Government has said they want us to “grow” out of the recession. While this may seem counter intuitive for many, there is certainly some merit to this as a concept – particularly if you unpack what “grow” could entail.

What can you do?

• You’ve heard it before. It’s not a new concept. But cash is king. Ensure you are preserving cash and are continually talking to your funders on a regular basis about how your business is tracking and how they can continue to support you under a variety of different scenarios.
• Take a critical look at your business. Consider not only your largest expenses, but also look at customer demands. It is likely they have shifted, and this trend may remain for at least 12 – 24 months. It’s time to shift with them.
• Forecast as best you can. This is when scenario planning – taking into account policy initiatives as well as the possibilities for lockdowns, like the one currently being experienced in Victoria will be vital to take to potential financiers and your Board to assess your next steps.
• Consider alternate financing and debt. With interest rates at record lows, investors are looking to put their money into growth areas. The banks are not the only source of funding.
• Act early. It is critical that businesses act early to get ahead of the curve.