What COVID-19 Has Taught Us About the Australian Economy
Now that vaccines are being rolled out across the world, many financial commentators are predicting a reasonably swift economic rebound for the Australian economy. So much so that some are even referring to a post-COVID mini boom, which is a far cry from the doomsday predictions made in March 2020.
So what are the big ticket items we have learned about the Australian economy over the last year?
1. Globalisation has many unexpected side effects: By definition, the premise of globalisation is that capital should flow freely to where it is needed so that countries can do what they do best under free market conditions. This effectively means that if a country has a competitive advantage in producing, say, hats, that country should maximise its capacity and capabilities to produce and specialise in hats. This sounds sensible in theory. After all, efficiency is achieved when we maximise output from finite resources, right?
In reality, COVID has highlighted that countries have become reliant on other countries for things they do not produce or produce well. All of a sudden, we come to the realisation that if we need medicine, we have to ensure that our supply chains in countries like China remain functional. As we have closed down a lot of our manufacturing capabilities and as international borders were closed, we find ourselves running out of things that are manufactured overseas like bikes, cars, etc. Thankfully, we produce more food than we need, which has minimised any panic associated with potentially running out of food.
Hopefully, this realisation will encourage the Australian Government to develop strategies that ensure we don’t rely on other countries for critical supplies used to sustain and keep our country safe. From a business perspective, this may provide new opportunities for those who are prepared to step into the brave new world.
2. People would continue to spend and consume in the face of a crisis: In an affluent country like Australia, contrary to what some people expected, we have observed that people did not stop spending when the pandemic hit. Rather, they changed their spending patterns and shifted economic activities from sections of the economy to others. Instead of buying overseas trips, we began to snap up new cars, lifestyle products, and even homes. Rather than going out to eat, which was not possible during the lockdowns, supermarkets were doing a roaring trade as everyone started cooking more and buying groceries on a regular basis.
Surprisingly, the Australian economy has displayed remarkable resilience and creativity as the market has quickly adapted to the new environment of the pandemic, and businesses swiftly changed their business models in the most enterprising ways to capture areas of the market to which consumers have shifted their activities. We have also seen many businesses quickly move more of their offerings online, while others changed how their products are packaged and sold to customers.
This demonstrates that unless the crisis we find ourselves in is protracted and impacts every part of the economy, economic activities would likely shift from one part of the economy to another, similar to what would happen to the contents of a stress ball when you squeeze it in your hand. However, this could only continue if there is no permanent damage to the overall economy. Otherwise, economic decline could spread across the entire economy like a bushfire, which is why government intervention is critical.
The challenge for any business is to remain versatile and clear-headed so that it can take advantage of the rapidly changing conditions, capture the areas of demand that would likely arise, and avoid the business models and practices that are outdated and no longer works in the new environment.
3. Market sentiment is based on perception and the Government’s job is to shore up that perception: While the economy can generally sustain momentary shocks and ‘black swan’ events, permanent damage may be caused if those conditions persist because businesses are inherently interconnected – regardless of how well they have survived the initial shock and the ensuing environment.
To minimise the chance of permanent damage, government intervention is very much a necessity to prop things up, which is precisely what the JobKeeper and Jobmaker Schemes are meant to accomplish. The idea is that once economic conditions regain a degree of normality, government assistance may be lifted and the businesses that have been surviving on external support would get back on their own two feet.
However, depending on the extent of damage a business has sustained and whether it has adapted to survive in the new reality, it is expected that not all of the businesses would survive. This may provide opportunities for those who remain to increase their market share. In that regard, the fittest may more than just survive – they will thrive.
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