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TOUGH TIMES, BUT HOPE GLIMMERS FOR MANUFACTURERS'

23-04-2020
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Industry Update spoke to St.George chief economist, Besa Deda and Matthew Kelly, St.George’s executive manager of manufacturing and wholesale, to get their assessment of the economic impact of the pandemic, and the opportunities that may unfold for Australian industry.

“The coronavirus is impacting economic activity quite sharply. We are seeing a recession unfold in Australia,” Deda says.

St.George expects the national accounts to show the Australian economy contracted in the March quarter and the current June quarter, with a further contraction “likely” in the September quarter.

“At the moment our forecasts are anticipating a recovery to come through in the December quarter,” Deda says.

“But much will depend on when the peak in new daily infections occurs and when the virus can be contained. The longer that takes, the longer the duration of the recession in Australia.”

It’s been nearly 30 years since “the recession we had to have.” In the decades since, only the global financial crisis (GFC) has come close to pulling the country into recession.

“During the GFC we did record a slowdown, but we didn’t record a technical recession,” Deda says. 

A technical recession is defined as two consecutive quarters or more of contraction in economic activity.

“At the time we were going through a once-in-a-century mining investment boom, which did help soften the impact of the GFC.”

As the COVID-19 pandemic evolves, it presents a unique challenge to economists attempting to forecast.

“Forecasting at the best of times can be hard,” she says.

“But the external shock to the economy caused by a health crisis without precedent in living memory has added a greater degree of variability to forecasts.

“There’s still a lot we don’t know about the virus, so the full impact on the economy is quite difficult to quantify.”

What is known is that economic activity is contracting globally, despite a wave of unprecedented stimulus packages worldwide. Deda says that the contradictory situation is a result of social distancing measures designed to contain the virus.

“The lockdown of societies causes consumer and business spending to fall quite sharply, which causes economic activity to contract. No amount of stimulus can prevent that, but health experts agree lockdowns are the most effective means to contain the virus.”

The ever-changing and unpredictable nature of the virus has produced a high degree of uncertainty among consumers, businesses and investors. Apart from the panic buying of essentials such as toilet paper, discretionary spending has taken a heavy hit. 

“The stimulus measures from the state, territory and federal governments and the Reserve Bank, as well as support from the banking industry, won’t be enough to avert a recession,” she says.

“They’re about trying to help otherwise viable businesses — including manufacturers — survive the crisis and limit the rise in job losses. It’s also about helping to build a bridge from now until the economy recovers.”

Manufacturing has weathered the coronavirus storm better than most industries: a survey conducted in late March and early April by the Australian Bureau of Statistics shows that 92 per cent of manufacturers are still operating.

“That’s quite a high share compared to other industries,” Deda says.

“It’s not the highest, but it’s one of the highest. That tells us that although the manufacturing industry is being impacted, it’s perhaps adapting to the circumstances.”

The survey otherwise illustrates the “large adverse impact” of the virus: 66 per cent of all businesses surveyed recorded a decline in cashflow or turnover, while 64 per cent reported a decline in demand for their goods or services. 

“For manufacturing there were no exact numbers given, but from the [survey’s] chart we can estimate around 62 per cent of manufacturing businesses have recorded a decline in business.”

Another survey, the Australian Industry (AI) Group’s monthly Purchasing Managers Index report, appears to show some good news, albeit likely to be temporary and brief.

“The March result was quite unusual because it showed a rise from 44.3 per cent in February to 53.7 per cent in March,” Deda says.

“That suggests expansion in manufacturing economic activity in the period ahead. If April continues to show growth it’s more encouraging, but for the moment I’d treat the result with a little bit of caution.”

The AI Group has reported that March’s surprising result can be chalked up to a surge in demand for manufactured food and personal care items as the virus took hold.

“Manufacturers that make these items make up a large share of manufacturing in Australia, so it makes sense,” Deda says.

And it’s the manufacturing industry that St.George believes will emerge from the pandemic stronger, thanks to the variety of stimulus measures available from the federal government, the RBA and the banking sector.

“I’d like to think this crisis will lead to a long-term cultural change that will promote domestic production,” says Matthew Kelly, St.George’s head of Manufacturing and Wholesale.

“Businesses will have to evaluate their processes and what their supply chain looks like. Some businesses might set up a second supply chain and look to develop a local supply, which I think will be fantastic for local manufacturing.”

Many local businesses have shifted their focus to producing items such as surgical gowns, masks and hand sanitiser as supplies from overseas dried up.

“We need to make sure Australian manufacturers can supply critical services in response to a pandemic or whatever a future crisis may be, and really try to support the industry so we have those onshore,” Kelly says.

To that end, St.George has put in place a number of measures to provide total support for manufacturing clients. According to Kelly, information is the most valuable tool a business can have.

“What I’d say to businesses at the moment is that it’s important to keep updated on the latest health information for themselves, their staff and their families, but also to stay across government responses to the crisis.

“Keep in communication with your suppliers, your landlords, and certainly, your bank.”

Australia’s rate of infection is slowing, particularly compared to the United States and Europe. It’s a positive sign, but Deda sounds a warning note.

“The new number of daily cases has slowed, which is encouraging, but a recession is still unfolding,” she says.

Looking to the future, much uncertainty remains — and Deda says “absolutely nothing” can be ruled out.

“Many economists are hoping Australia’s recovery from the virus and its economic impact will be V-shaped.

“It could end up looking U-shaped because current behaviours will linger for a time. Even once restrictions are lifted, we are not likely to get a return to pre-crisis conditions and business-as-usual straight away.”

Kelly says that St.George’s measures to support business, particularly manufacturers, are part of a long-term strategy to help future-proof the industry.

“St.George is fiercely committed to helping Australian manufacturers and wholesalers into the future. We’ve got unsecured three-year loans of up to $250,000 for eligible businesses. We’ve reduced our overdraft rate by two per cent. We’ve got merchant terminal relief, we’re deferring loan payments, and we’re continuing to invest in industry,” he says.

As the world adapts to the “new normal”, all eyes are on the future. Kelly says that’s where businesses need to be focused.

“You need to look into the future, look at what the next six to 12 months look like for your business, and look at what changes you need to make if this situation is prolonged.”

In the meantime, he adds, there's plenty of support available from financial institutions as we weather the storm.

“We’re absolutely here and committed to Australian manufacturers for the long term.”

For more information and advice on how St.George is supporting customers and the wider community through the COVID-19 situation, please visit: https://stgeorge.com.au/covid19

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