Coronavirus, or COVID-19, has thrown many challenges and headwinds to the broader economic community in 2020 and these effects will continue to be felt for some time to come. Small to medium-sized enterprises have, in particular, faced significant challenges and ripple effects during this time. We have chosen to cover five of the most prominent economic influences in our experience, however there are many more that are not listed here.
There has been a range of Government Fiscal policy measures that have been implemented throughout 2020 to help mitigate the disastrous effects of lockdowns and decreased economic activity across Australia. Government fiscal policy measures have included but not limited to:
All of the measures taken by the government in their fiscal policy are designed to increase economic activity in a time of potential decreased economic activity. This softens the hardships faced by small to medium enterprises that otherwise would not be able to weather such decreased revenue, offering assistance in an unprecedented time in world history.
Monetary policy implemented by the RBA’s emergency rate cuts of 50 basis points to a record low of 0.25% (as of 3rd November) is one of the defining pieces of monetary policy implemented by the RBA to ensure overall liquidity across the economy. The goal here was to see an across-the-board impact for both households and businesses, by reducing funding costs for various levels of debt instruments (think house mortgages, business finance etc). In doing so, the RBA was hopeful it would result in increased economic activity, whereby there would be a softened blow to the gross domestic product (GDP) output across the country. These actions are a major piece of the economic influences in reaction to the COVID-19 crisis, and a complete picture of the results is still unknown.
Unemployment numbers have been subdued in reaction to the COVID-19 crisis, with economic effects being less in comparison to initial projections. This is mainly due to the fiscal policy implemented by the Australia Government, which has allowed for reduced wage bills being faced by small to medium enterprises. In light of this however, unemployment has continued to trend upwards towards 8% and it is clearly evident when unemployment increases, GDP and economic activity will suffer accordingly. It is always important to keep an eye on unemployment trends when making business decisions, as it can reflect the broader economic environment you wish to operate in.
GDP is a reflection of the output that the Australian economy produces. The data is collected by the Australian Bureau of Statistics and reflects the health of economic activity. This year, GDP has fallen by 7.3% overall in the months to June 2020. GDP figures are a lagging indicator of economic activity and sometimes not suitable in making business decisions, but they will provide a great indicator to how the economy is performing on a long-term basis.
A government policy that has been under fire throughout the COVID-19 economic crisis during 2020 is that of the relaxation of insolvency laws between 25th of March and 25th of September. The normative policy is that directors who incur debt during the time that their business is insolvent becomes personally liable for that debt. This however has been given a relaxation during the economic events associated with the Coronavirus and should pose as a warning when operating as a small to medium enterprise. The risk in this policy is that it will allow ‘Zombie’ firms to operate and you could have debts payable from these firms that would otherwise have been wound up. It is important to be wary of allowing firms credit accounts and credit arrangements in 2020 and to ensure you do your due diligence around their financial health.
We have a long way to go until the COVID-19 economic crisis is overcome, and the effects could be felt for years to come. When making business decisions for your small/medium enterprise is important to continually consult the broader economic environment and reflect on fiscal and monetary policy.
We would love to have some feedback on the above economic influences and how they have impacted your small to medium-sized business. Has your business seen the effects listed above? Or have you been impacted in alternative ways?