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Australians' should not be lulled into a false sense of security (Part 2)

Posted by James Cagney on 17 June 2020

Do not be lulled into a false sense of security (Part 2)

 

The Coronavirus COVID-19 has thrown world economics into turmoil. Time tested principles like "Supply and Demand" has economists at a loss as to how this pandemic will pan out. Let's look into some of the issues we have in Australia taking "Supply and Demand" principle into account.  

We dealt with "Demand" in Part 1. It is essential to read this before you read the information below to fully understand how the "Supply and Demand" principle is affecting our lives in Australia. If you did not have the opportunity to read PART 1 go to the list of blogs available by clicking PART 1.  

We cannot deny that COVID_19 has affected most markets in Australia. A market that has been bent out of shape by forces out of its control will try to go back to its former shape. Just like bending a plastic ruler once bent tries to go back to its former shape. However, many of the markets within Australia may never get back to their former shape.

Most businesses were unprepared for the effect of COVID-19.  Many people are artificially in employment because of JobKeeper. What will happen after September when demand for many products and services will not be sufficient to keep these employees in gainful employment.

The government subsidies and grants for business will end soon. How difficult will it be  for companies to raise capital from the banks after September? Banks are not in the business of risk. Businesses will have to sign their assets away to get a loan.  

Worst of all, this is not limited to Australia. It has affected almost every country in the world. Many of these countries are buyers of Australian goods and services which will have a devastating effect on our balance of payments. The coalition are already talking about a $1 trillion plus deficit and the lack of exports will add to the national debt.

The Australian Government has to pay off the $1 trillion plus debt with the generous subsidies and grants. What has happened is that the Coalition government has abandoned their premise that they are "Better fiscal managers than the opposition Labor Party". It will be interesting to see what the Labor Party will have to say about the fiscal management of the Coalition at the next federal election.  

Supply & Demand

The fear and uncertainty that surrounds the markets right now has resulted in many major projects being delayed. Scot Morrison (SCOMO) announced this week that certain major projects will be fast tracked. The JobMaker program will inject another $1.5 billion to fast track a number of major projects. However, the Federal government does not have a money tree:  

Adrian Dwyer, Infrastructure Partnerships Australia Chief Executive, said that while fast-tracking existing projects would bring jobs online sooner, more needs to be done to revive the economy.

"If the Federal Government wants to supercharge aggregate demand it should use its balance sheet capacity to deploy more money into new infrastructure projects," Mr Dwyer said.

Unfortunately years of Federal & State government friction has caused too much red tape and although SCOMO is endeavoring to overcoming these it is going to take time and the reality is these major infrastructure projects will not come in time to employ the hundreds of thousands of workers that will have no jobs and limited income after September 2020.  

We need more building projects to employ the thousands of unemployed labourers. Many of the building and property development projects simply will not go ahead because they are too risky for lenders and investors. We are not going to get the large cash flow into the economy that creates the supply we need for new houses over the next 5 years.

We're seeing a big drop in construction work, which means there will be less housing supply in the medium to long term.   This means higher rent in the future which effectively reduces the amount of discretionary spending families have available, which is essential to our economic recovery.  

The recently announced government grant of $25,000 for building a new home or renovating an existing home will help to keep some construction workers employed but will not save the industry. The government has excluded investment properties from the scheme, which is a great pity as this would have created many more jobs that would provide an incentive for investors to purchase property now.

The grant will have had a positive impact on property prices. Once again, the short sightedness of politicians and bureaucrats will not save the construction industry nor will it be sufficient to revive the economy.   

What we see in Australia right now is the current stimulus is not able to create the supply of houses needed to create sufficient growth in the economy. If construction workers have no jobs they cannot afford to buy or rent a nice house, spend money on their kids, buy new cars, go on holiday and the economy as a whole suffers.  

However, it will take a while for housing supply to start catching up with that demand. The good news for existing property investors is that property prices will increase in the medium to long term because folks need a roof over their heads.

Let us look at other industries within the Australian economy.

There is low consumer confidence in the Australian economy right now and a combination of a contraction in both the supply and demand will inevitably results in a credit squeeze.

And we saw something similar in the wake of the GFC, as the credit squeeze continued we saw a surge of people who struggled to pay their credit cards, mortgages, and everyday bills. Defaults increased dramatically which affected consumers ability to borrow money in the future.

How will people be sure of employment after September because there will be others who have been out of work and living on Job Seeker and have been able to just make ends meet. Will these people be prepared to work for less money than you are receiving? How attractive will reducing the payroll be to a business that is struggling to make a profit.  

Unfortunately, the future means that our standard of living in the medium to long term will be worse than we have today. Will the "Lucky Country" not be so lucky anymore!

However, there will be opportunities in the months ahead for Australians to be employed and /or start their own business. I will cover these opportunities in PART 3 of this Blog. Keep an eye out for my next blog next week.

Any questions, comments or suggestions can be sent to jfc@jamescagney.com.au . 

Author: James Cagney
Tags: Part 2 - Dont be lulled into a false sense of security
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