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The world, and now Australia is firmly in the grip of the coronavirus pandemic. COVID-19 has been declared a pandemic. This means that it is moving quickly through the population from person to person in multiple centres throughout the world. Through media, everyone would be aware of its existence and the potential risks associated with it. Some of the responses are related to a fear response among the population and we begin to see some irrational behaviours like the run on toilet paper at the almost trivial end and the strong urge to sell stocks leading to massive devaluations of the asset based economy.

Whether it is driven by fear or population illness, the fact remains that the last few weeks has seen a very negative economic impact, and this is likely to worsen.

 

Consider the Stock Market – The Impact is Obvious and Devastating

This week has seen the stock market crashing day-on-day as the chart below shows and it has further to fall.
The chart below shows the movement of the ASX200 in the past few weeks. It is a dramatic fall, representing a 30% loss in the value of the underlying stocks. This is a larger fall than experienced in the GFC and much, much more rapid.

 

 

ASX 200 on 16 March 2020

The ASX fell off a cliff from its maximum high with the start of the coronavirus pandemic announcement.

 

 

 

What is more concerning still, is that the price of gold is also declining. This is important because usually when investors are seeking safety, they move to gold. However, the falling gold price suggests that investors are taking their money out of the market altogether.

 

Falling Gold Prices

When the stock market prices fall AND gold price falls, then investors are leaving the market altogether and not just moving to a safer environment.

Of course, you might have not interest in trading the markets and this could be considered someone else’s problem. However, these observations are important because there are inevitable flow-on effects that that follow on from these events.

 

The Direct Impact of COVID-19

The rapid infection of the population is having an impact on the population. The most at risk are the elderly, though small numbers of young people, particularly children can die. As a result of the relatively high and rapid death rates, governments across the planet are trying to slow down its spread – mainly to relieve pressure on the hospital systems so that they can cope with the waves of patients that will wash over their doorstep. This means that workplaces are restricting time at the office, many asking staff to work from home, or to attend work on alternative days to reduce the chance of the whole workforce being quarantined at the same time. Some work places can’t achieve this because of the nature of their work and businesses are closing their doors, hopefully temporarily but it is likely that many will never re-open. Even at this early stage, it is predicted some of the world’s airlines will be bankrupt within 2 months.

The real problem is that this crisis is not going to last for days or weeks, it is likely to last for months, perhaps as many as six months. This brings home the difficulty that many businesses are going to have maintaining an operation. It is the length of time that this goes on for, that will have the biggest impact on business outcomes.

 

Recession Will Surely Follow

Before you consider if we are going to have a recession, you need to know what a recession is. In general terms, a recession occurs when there is negative economic growth over a period of time. It is defined by economists as the occurrence of two quarters of negative GDP growth.
In Australia, the most recent GDP data shows growth of just +0.5% and the next GDP data is due out in the coming weeks. It is likely that we will see a further fall of the GDP, perhaps to negative territory. However, a technical recession will be declared until there is negative GDP growth at the end of the following quarter in June.

 

A Severe Recession Leads to Lower Employment

As economic growth stagnates companies have less revenue and workers are laid off to reduce costs. Often, casual staff will be first affected, but even permanent staff will be affected as time goes on and businesses are forced to reduce their overheads in a bid to try and survive.
In turn, this creates a reduction in consumer spending which slows growth even further and companies reduce their workforce even further. It becomes a vicious cycle.

The Recession Employment Vicious Cycle

The contraction of business activity creates a vicious cycle that affects employment, spending and further reduces business activity.

What Does History Tell Us?

Between the 1919 and 1921, the world experienced the last major pandemic, the Spanish flu, at the end of WWI. It was devastating, and killed more than 50 million people, which is more than 6 times as many people as WWI killed. The economy was in poor shape for several years after the end of the pandemic though the effect of the war is usually thought to have a stronger influence than the pandemic.
The most important fact is that the pandemic did end. Some businesses suffered and even folded under the economic pressure caused by the pandemic, but it did end. This pandemic will end too.

 

So, What Can You Do?

Lay-Offs

There will be a tension between:

  1. 1. On one side, caring for and supporting your business, and
    2. On the other hand, ensuring that your staff are looked after as much as possible.

Sadly, there are going to be many situations where there is no alternative to reduce your staff numbers, this means that people will be given bad news. In fact, we have already noticed an increase in the number of potential candidates calling our office looking for work, especially in the less skilled end of the range.

It is important to do this as carefully and sensitively as possible. Not only are they losing their current job, the prospect of getting another job might be slim for some time.  This is going to be very sad news for many of these people who rely on their weekly wage to pay for everything each week and they would have little or no padding to keep them going for even a short time.  They will be in serious trouble very quickly and you need to at least acknowledge that.

Protect Your Key Staff

There will be key staff who you cannot afford to lose because of what it might mean for the success of the business in the future. This might require some creativity including have them:

  1. Work from home and take advantage of digital portability.
  2. Focus on improvement courses or programs to take advantage of the available time to ready the business for improvement.
  3. Re-focus on other areas of the business for the time being, areas that might normally be ignored because of other workloads.
  4. Take accrued annual leave.
  5. Take leave without pay.
  6. Work shortened hours.

It is important that you ensure that you follow all of the safety precautions recommended by the authorities to ensure the safety of your staff. This includes ensuring that staff who are ill are not at work, surfaces are properly cleaned on a regular basis, social distancing recommendations are followed, any formal quarantine measures are adhered to and so on.

Look for Different Opportunities

It is going to be challenging, but challenging-times often present new opportunities or force people to apply skills differently. This is no different, and there may be things that you can do differently that might even allow you run your business more efficiently in the future. Consider everything.

Scale Up Again

While business life is looking shaky right now, the pandemic and the economic downturn will pass. Businesses that have been able to hold on by reducing their expenses, and have even been able to develop new efficiencies, will ultimately be in a position where business is getting busier again. This is the time to start increasing their activity and bringing staff back to fill the gaps. In all likelihood, it will create a new era of positivity as life emerges from coronavirus and surges ahead.

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