Written by Guest Author: Aniket Panesar
So it’s pretty clear, COVID-19 has not been good for the economy. The COVID-19 crisis has resulted in increased financial market volatility, depreciation of the Australian Dollar and has led to sharp increases in unemployment levels within Australia. Considering this, it has not been a good economic start for 2020, and it’s not predicted to get better for at least a while. So, what are the main economic impacts that have been felt in Australia and globally?
The share market crashed globally. This is a big one. See the thing is that the pandemic has caused high volatility in global share markets. Essentially this means that the price of shares changes rapidly and unpredictably. For example, the Australian Securities Exchange (ASX), which is the Australian share market, experienced a 9.7% decline in the value of shares on the 16th of March. This was the biggest one-day fall since 1987. It’s pretty clear looking at the graph below that share prices for the ASX 200 peaked at the end of February, before steeply falling throughout March.
Why is this the case? How does COVID-19 affect the share market value? Well, it’s primarily through lowering investor confidence. The crisis has resulted in many businesses having to close down and reduce the level of production. This has effectively increased uncertainty in financial markets and hence reduced investor confidence, resulting in increased volatility of shares. The worst-hit companies are mainly hotels, airlines, cruise lines, oil companies and entertainment companies. On the other hand, e-commerce companies such as Amazon, Microsoft and Netflix are having the time of their life as their share prices skyrocket.
The talk about the share market begs to ask the question. Is this a good time to start investing in shares? In my opinion, this is a great time to start having a think about it! If you are someone who has never really thought of investing in shares before, it might be that time to consider it now! Do some research, look into it, you never know… in a few years, your money could potentially increase!
Another significant impact of the COVID-19 crisis is the increase in the level of unemployed individuals. Due to the lockdown within Australia, it has been challenging for a lot of individuals to seek work and continue their employment. The crisis has seen a reduction in the level of hours for casual workers, contractors and many full-time workers. Those who are seeking work are also struggling to find a job. In fact, unemployment rates have increased from 4.9% in March 2019 to 6.2% as of March 2020.
What has the Australian Government done about this? The government has set out a variety of stimulus packages, targeting individuals who are already on welfare payments and those who have experienced a reduction in working hours or business turnover. However, this does raise the question, has it been effective? Well, it has most definitely benefitted those individuals who are unable to earn an income throughout the crisis, by compensating them for the income they would have received otherwise. This supports a lot of individuals and helps them to maintain their standard of living throughout the crisis.
However, has it been the fairest allocation of money and resources? Yes and no. In one sense it’s appropriate that those individuals who are unable to work are receiving these payments. However, is it really fair that some full-time workers in industries such as retail are compensated the exact same amount as casual and part-time workers in the same industry? I would say it’s not the fairest distribution of money. Think about it. A casual worker may be earning let’s say $250 in the week as opposed to a full-time worker who earns maybe $1000 in the week. As a result of the COVID-19 payments, the causal worker and full-time worker both now earn $750 in the week. Bit harsh for the full-time worker, while the casual worker is having the time of their life.
Perhaps a better allocation of money would be to pay workers a certain percentage of their regular income as compensation. The UK government has adopted something similar to this where the government provides money to companies to pay their workers 80% of their regular wages. This is perhaps a fairer allocation as individuals receive an income similar to what they would typically receive.
Another impact of the COVID-19 crisis has been the reduction of the interest rates by the Reserve Bank of Australia (RBA). As a result, interest rates are currently at 0.25% in May 2020. Yes, this does beg to ask the question… what happens if we get to 0%? Will it happen? What does that even mean? But before we get to that, let’s understand why interest rates are so low right now.
Essentially, the Australian economy was slowing down before COVID-19 with economic growth reducing to levels resembling the GFC. The COVID-19 crisis has caused a further reduction in the level of output in the economy while it is projected that inflation levels will decrease below 2%. Keep in mind that the target rate for inflation is between 2-3%. This has resulted in the RBA lowering interest rates from 1.5% in 2018 to 0.25% in 2020 in an attempt to increase the amount of borrowing and consumption within the economy, to boost economic growth and inflation in the future.
So… is it likely that the interest rates can go to 0%? Perhaps. It is an unconventional monetary policy tool; however, it is not unseen. Nations such as Japan, Switzerland and Sweden have all hit 0%, with some of them even going to negative interest rates! What does that even mean?
Well, negative interest rates mean that individuals are more likely to hold cash as opposed to placing money in a bank. This is because theoretically, individuals would have to pay the bank to keep their money as opposed to the bank paying individuals interest.
So, there are some of the main impacts on the economy. But what is next? Is the economy going to recover and how long will it take? The economy will eventually improve; however, it will take a very long time. It isn’t something that is going to happen overnight. My best guess is that it will take about 2-4 years for Australian shares to return to their ‘pre-coronavirus’ levels, while unemployment levels may return to normal in 1-2 years. Also, the RBA has stated that interest rates will not increase until they are confident inflation and unemployment levels are at sustainable levels.
Overall, there are some significant economic downsides of the COVID-19 crisis; however, it is expected that things will return close to normal within the next few years.