“There has been a lot of talk about the COVID-19 induced recession. For many Australians this will be a new experience, we haven’t had a recession since 1991, and until recently there was frequent talk of Australia’s record run of unbroken economic growth.”
The reality is that the youngest people in Australia with any memory of a recession are now in their mid to late 40s. This means that most of Australia’s workforce has no experience of a recession, and even fewer people have experience of managing a business through a recession.
Recessions are a natural part of the capitalist economic cycle, and it was inevitable that Australia would eventually have one.
So what is a recession?
Technically a recession is two consecutive quarters of negative economic growth. The economy gets smaller. In practical terms, a recession is hard. There is less money being spent.
People lose their jobs and have less money to spend. People are afraid of losing their jobs, so spend less. School leavers and university graduates can’t get jobs, so don’t have money to spend. People can’t pay their mortgage and are forced to sell their houses. More houses are for sale, but there are fewer buyers. House prices go down. Homeowners experience a negative wealth effect due to the declining value of their home, which makes them feel poorer. So they spend even less.
Businesses experience less demand and reduced profit. They downsize as a means of protecting profits. So more people lose their jobs. And the cycle goes on, which leads to less and less expenditure.
Now that a recession has arrived, Australia’s extended period of economic growth becomes a handicap. Why?
Australians and Australian businesses have grown used to the good times, and there has been a tendency to take them for granted. Everything is easier during a growth phase. There is more disposable income available, and there are higher levels of employment. Consumers and businesses have more money and are more willing to spend, and there are more of them. Companies can make a profit with less effort.
The good time breed complacency and can lead to poor commercial and management practices. Costs can be allowed to expand and productivity to decrease because the bottom line remains strong. Poor practices in relation to recruitment and staff management can creep in without any discernible impact on revenue or profit. There can be less innovation because easy profits remove the incentive to innovate.
Virtually all our major trading partners experienced a recession following the GFC and have plenty of businesses and managers experienced in responding to and adapting in response to a recession. We don’t. Most Australian managers will have no experience of a recession, and naturally, no expertise in responding to one. While some managers may have experienced the 1991 recession, they were likely at the beginning of their careers and were not in decision making positions. Accordingly, many Australian businesses and managers having to respond to this recession are dealing with something they haven’t experienced before.
A further handicap that Australia faces is that the COVID-19 border closures have strangled population growth. For many years Australia’s GDP growth has been propped up by immigration in the vicinity of 1%. They were effectively adding an extra 1% to growth as a result of the increased demand. This growth via migration has now been closed off and is likely to remain much lower even once our borders re-open.
How a recession affects business
As a business owner, you depend on other businesses and consumers spending money. You compete with other companies for that money. With fewer people spending, you have to compete harder against every other business to motivate consumers to spend their money with you.
The effects of a recession are felt for years after, even once growth has returned. Growth returned in the second half of 1991. However, unemployment peaked at 11% in 1992. It took nearly 10 years for employment to recover to pre-recession levels.
Treasury is projecting similar levels of unemployment arising from this recession. Already there are over 1 million Australians out of work. Those people now have less money to spend than they did at the start of the year.
So far, things are a bit different this time. Primarily due to the government’s Jobkeeper program and the banks’ loan payment holidays. However, these programs cannot continue indefinitely, and it is starting to look like they are delaying the inevitable. Once they are removed, instead of a ‘snap-back’ to business, as usual, it is likely that the full effects of the recession will start to be felt. While some companies may ‘snap-back’, it is expected that many businesses will not return once the artificial support of these programs ends.
An examination of ASIC’s insolvency statistics demonstrates this. ASIC shows a total of 1,747 companies entering administration during the 2020 March quarter compared to 1,203 in the 2020 June quarter. The figures for 2019 were 1,817 in the March quarter and 2,095 in the June quarter. Accordingly, the number of administrations remained relatively similar between the March 2019 and 2020 quarters. However, there was a 42% reduction in the 2020 June quarter compared to 2019.
In Accommodation and food services, the sector most impacted by the COVID-19 lockdowns, the figures are even more disparate. 255 companies entered administration in the 2020 March quarter compared to just 139 in the June quarter. In 2019 the number were 259 and 275 respectively. Again the March figures are relatively stable, with a nearly 50% reduction in June. A similar effect is seen in personal bankruptcies, where the 4,239 personal bankruptcies in the 2020 June quarter were 35% down on the 2019 June quarter. Personal bankruptcies in the 2020 June quarter were the lowest since the March quarter of 1990. This is counterintuitive in a recession.
It was the June quarter where the economic effects of COVID-19 and the consequent lockdowns were felt. However, this is not reflected in the insolvency and bankruptcy numbers. Logically, one would expect that there should be more, not significantly less, administrations in the 2020 June quarter, especially when the numbers increased between the March and June quarters in 2019.
The most likely explanation is that many companies are being artificially kept out of insolvency and administration by Jobkeeper and the Banks’ loan holidays. It seems probable that once this support is removed, there will be a snap-back in the number of insolvencies and administrations.
The outcome of all this is that there will be fewer businesses and people spending less money and more intense competition for every dollar spent. The Australian handicaps mean that many Australian businesses are not well placed to weather this storm.
A recession is a form of creative destruction. It restructures and redirects an economy. It incentivises reform, and it offers agile businesses a chance to change direction or assess their operation. Those who fail to do so will fail.
The 1991 recession is credited with promoting higher levels of education and the rise of a strong tertiary education sector. Young people could not get jobs, so they stayed in school or went to university instead. This promoted a structural change, with tertiary enrolments remaining high ever since the 1991 recession. The 1991 recession hit manufacturing hard. The damage to manufacturing and the increased educational levels resulting from the recession acted to hasten the growth of services as a proportion of the economy and position Australia to take maximum advantage of the economic boom of its regional neighbours by supplying them with high-value services.
Recessions provide the impetus for government reform. Reform that has mostly been missing from Australia since the introduction of the GST. Recessions mean that governments can no longer kick the can any further down the road. Something has to be done. The advantage for governments is that recessions tend to facilitate an understanding of this from the broader electorate.
The policy response to the 1991 recession saw a focus on deregulation, opening sectors such as energy and telecommunications up to competition and reductions of tariff protection. Businesses that acted early and either entered newly contestable markets or adapted to increased international competition benefited as a result.
What we can understand from past recessions is that:
- There will be structural economic change
- There will be policy reform
- Things will get better
These factors mean that businesses that survive the recession and have the flexibility to identify and adapt to changes and new trends can thrive post-recession. How can you position your business to survive the recession and adapt to the new future? To survive this recession and thrive in the future organisations need to learn to compete better and harder:
- You need to understand your market. Who your customers are, what their wants and needs are? How are they evolving? Who are your competitors?
- You need to utilise data. It would be best if you were collecting and analysing your own data, identifying trends and opportunities.
- You must be better than your competitors. What do your competitors do? What is your point of difference? Whom would you choose if you were in your customers’ shoes?
- You must be agile and adaptive. To be agile, everyone needs to be on the same team. When you spot an opportunity, you will need to assess it and make an informed decision quickly. You must understand what you can and can’t do and have the analytical resources to evaluate and weigh opportunities. Many businesses have already done this in the COVID-19 environment – distillers switching from spirts to ethanol, restaurants pivoting to offer delivery services.
- You need to have the right people in leadership positions. Managers need to be able to make considered, evidence-based decisions, do so swiftly, take informed risks and be prepared to admit mistakes and adapt when something doesn’t work.
- Teams need to operate at maximum productivity, which will necessitate high levels of morale and motivation. Managers need to be not only good at what they do, but also good at managing and motivating their teams. You must recognise that people management impacts the bottom line.
- You must live your values. You chose them because they are essential. However, for far too many businesses, values are aspirational. If you have values, you must make sure they are followed.
- You must value your customers and staff. You rely on them. Without them, you will fail.