Banks and economists are braced for a flurry of small business insolvencies and warn of much deeper economic damage due to the coronavirus pandemic than first forecast due to the length of Melbourne’s lockdown.
The city’s retailers enjoyed a bumper first weekend of trading after the easing of restrictions on hospitality and retail businesses following the city’s gruelling 15-week lockdown, but industry groups say the real litmus test for the strength of Victoria’s economy will be early next year when JobKeeper ends.
Consumers flocked to Melbourne’s high streets and shopping precincts, with many sectors enjoying a bigger post-lockdown rush on spending than expected. The City of Melbourne’s pedestrian counting system showed hourly foot traffic peaked at almost 2800 people walking through Bourke Street Mall on Sunday, more than eight times the four-week average and more than 1000 extra people beyond the 52-week average.
But retail groups have warned that the trading bonanza won’t last beyond the new year, with the withdrawal of JobKeeper the real indicator of whether businesses will survive in the long term.
The Australian Industry Group’s Tim Piper said he expected the post-lockdown retail boom – which coincides with the traditionally busy Christmas trading period – to taper off in January, at which point many businesses would still have much bigger hurdles to clear.
“The lead-up to Christmas would be vital for businesses to see them through the next period, but I have concern for business when JobKeeper evaporates, or disappears, which is going to be the real litmus test for where the economy is at that stage,” Mr Piper said.
“I’m certainly hoping it will improve, but there will be more unemployment by then and there will still be significantly high underemployment.”
Melbourne businesses closed en masse in early August as Victoria’s second wave of coronavirus cases surged, at its peak reaching more than 700 new cases a day, leaving all but essential retailers such as supermarkets open to customers, hospitality reduced to takeaways and other businesses only able to sell goods online until restrictions were eased on Wednesday.
There were no cases of coronavirus recorded on Sunday, bringing Melbourne’s rolling 14-day average of new cases down to 2.2, while regional Victoria’s average remains at 0.
While the numbers are looking up, the financial damage caused by the shutdown is still being counted. The state government is primed to deliver its biggest budget on record in coming weeks to help stem the damage, but some believe it could cost billions more than earlier estimates suggested, which will take until well into next year to become clear.
Franchise Council of Australia chief executive Mary Aldred said communities were “pulling together” to support Victorian businesses that were hit harder than other states due to the prolonged lockdown by directing their post-lockdown spending towards local traders, but there were still major obstacles.
“It’s probably too early to tell what the longer-term trends are going to be, but in the first couple of days of opening up, it was like Boxing Day,” Ms Aldred said of the first few days of retail.
“There’s a couple of key things we need to watch for because we’re in the early days – some of those key things will be the end of JobKeeper and when bank loans are called back.”
Judo Bank is forecasting significant bad debt losses from its small business customers, with Victoria expected to be at the centre of a raft of small business insolvencies that will hit the Australian economy next year. This is when an estimated $40 billion worth of unproductive liabilities that have built up during the pandemic become due.
Its estimate, based on data from the prudential regulator, includes business deferment of expenses such as rent, taxes and loan payments which still need to be paid. While only a portion of these loans and liabilities will go bad, it will be enough to send a huge number of businesses to the wall.
“As the relaxation of the (insolvency) laws reverse you can expect a huge spike of insolvencies, a tsunami of insolvencies,” Judo Bank co-founder Joseph Healy said.
Victoria would be especially hard hit because of the duration of the lockdown, he said. Of the $40 billion of unproductive liabilities on business balance sheets, Judo estimates that up to $27 billion of that is related to Victoria alone.
“We expect that that small businesses will struggle much more in Victoria than they will in other parts of the country,” Mr Healy said.
AMP Capital chief economist Shane Oliver’s revised forecast suggests the Victorian economy will take an additional $5 billion hit, due to the initial six-week shuttering of businesses to curb the spread of the virus going much longer than planned.
“Unfortunately, Melbourne’s stage four lockdown continued for much longer than the six weeks I had originally allowed for, and so adjusting for this, the hit to the Victorian economy is now estimated to be around $17 billion,” he said.
Mr Oliver said the figure represented about 14 per cent of Victoria’s quarterly GDP, but the impact would be spread across the September and December quarters.
Last week, Melbourne-based ANZ Group also reported that the real impact of COVID-19 would be felt next year and put aside an extra $1.1 billion for bad loans.
ANZ chief executive Shayne Elliott Elliott said the loan impairment provision would protect the bank from small businesses and individuals that could go bust once government support packages that are “buying time” are cut off.
The bank reported that around 2000 business customers have received a four-month extension on their loan deferrals “of which 60 per cent are in Victoria and impacted by the longer lockdown”.
It won’t be a surprise to the federal government. When Treasurer Josh Frydenberg added $15 billion to JobKeeper in August, he expected $13 billion of this to flow to Victoria.
“We believe that about 530,000 extra Victorian employees will now join the JobKeeper program over the September quarter; that means 1.5 million Victorian employees will be using JobKeeper,” Mr Frydenberg said at the time. “That’s nearly half of the private sector workforce across the whole state.”
The state government said it had pumped more than $13 billion into the economy, in the form of infrastructure projects and financial support for businesses, to cushion the blow against the pandemic-induced recession, and would present much more assistance in its upcoming budget.
“The budget will continue our efforts backing businesses, workers and families at a level never seen before in our state’s history, while delivering investments to ensure that each and every Victorian can reap the benefits,” a spokeswoman said on Sunday.
Some small retailers are already feeling buoyed by brisk trade since reopening. The Fair Trader Store in Northcote, business has been booming, with sales exceeding owner Bronwyn Newnham’s expectations.
She recorded a 25 per cent increase in her revenue, compared with the same time last year.
Ms Newnham and her seven staff have been on JobKeeper since it was introduced. She said they had spent their time in lockdown building an online store to be able to continue trading.
“People are celebrating the relaxing of restrictions … and also throughout lockdown, they have realised what brings joy to their lives and what they have missed,” Ms Newnham said.
“A lot of people have come in, worried about us, wanting to support us and support our producers, and they’re articulating that. That’s been really special for us. When we’ve been busy, they’ve been really patient about waiting and really following the guidelines.”
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