I was just finishing university when Australia had its last recession and I honestly don’t remember that much about it. I do recall our then Treasurer Paul Keating famously declaring that this was “the recession we had to have” and getting my first job as a graduate was very difficult, but the gravity of the situation certainly didn’t sink in as I was in my early 20’s.
That recession was in 1990-1991 and we have been fortunate to escape recession ever since, even during a Global Financial Crisis. Thirty years later due to circumstances beyond our control we are slap bang in the middle of a severe recession. This means that most business owners, including myself as a 51 year old, are experiencing this for the first time. It is uncharted territory in so many ways.
Technically a recession is a fall in Gross Domestic Products (GDP) for two quarters in a row. If you are not sure what GDP is, think of it like revenue in your own business. GDP is the collective revenue for the country. It is better to have more revenue than less in our country, just like it is better for your business to be selling more, not less.
When I think about recessions I am taken back to high school economics. I loved economics at high school, but hated it at university. In fact, I sucked at university economics because it was very complicated. When we were discussing things like monetary and fiscal policy, supply and demand at high school, it just made sense. High school economics started my love for business. I really think as a first step to tackling this recession we need to revisit the fundamentals we were taught in high school.
I am not suggesting that this recession is as simple to understand as high school economics. We have a layer of complexity that we have not confronted before in COVID-19. Economics is based on the “perfect” market, which means that resources can simply move from one place to another when an opportunity arises, and information is equally available to everyone so that decisions can be made in a timely and efficient way. This notion is unrealistic even in normal times but with the shut down restrictions and border closures, our market is far from perfect right now. Yet that will not prevent our leaders from resorting to basic economic principles to help dig us out of this recession.
Supply and Demand
If you studied economics you will recall drawing a simple graph to demonstrate that the market price of a good or service is the intersection between supply and demand. While that makes total sense, it is something we can overlook when we are pricing the products or services we sell. We have seen some excellent examples of Supply and Demand impacts in the past few months as the price of products like hand sanitiser and face masks has skyrocketed as they have had a shift in demand, and the supply chain cannot meet that demand. The price is correspondingly much higher than it was at this time last year when we didn’t really need these products in the same way that we do now. On the other hand retail outlets are constantly reducing the prices of their products to get stock moving. People are just not buying certain products at the moment.
What is the demand for your product and how has it been impacted by COVID-19? Life has not stopped altogether but if your product is a bit of a luxury, or something that can be delayed until better times, you will be starting to see a decrease in your revenue. Knowing your customer, what they are experiencing and how this will impact their spending is critical to understanding the demand for your product.
If the demand for your product or service is reducing you need to consider a couple of things. Clients will be price sensitive and maybe now is not the time to be raising prices. You still need to make a living so rather than dropping prices perhaps you need to be ahead of your competition. Word of mouth is going to important and excellent customer service will help you to beat your competition when the pool of work reduces. There will be competitors who undercut you on price but having the confidence to quote well and inform your potential clients of the benefits of quality over quantity will be more important than ever. How will your business sharpen the experience for the customer? How will you adapt to a reduction in demand for your products or services?
Monetary and Fiscal Policy
The two main ways a government can influence the economic outcome of a country are through Monetary Policy and Fiscal Policy. Monetary policy is all about interest rates. Changes to interest rates will impact our decisions to invest and save, as well as impact how much foreign investment we attract. This delicate balancing act in turn impacts our economy.
The Reserve Bank of Australia look after monetary policy and you are probably familiar with the monthly publication of the official cash rate. Reducing the interest rate is a tool to increase the investment that businesses make in our economy which should increase our GDP. The official cash rate is currently sitting at 0.25% as a result of many years of reduced interest rates. At the present time, monetary policy has pretty much done what it can. We really can’t go too much lower.
Without the assistance of Monetary Policy, we need to rely on Fiscal Policy. Fiscal Policy is money injected into the economy from the government. We are witnessing an incredible shift in our Fiscal Policy right now as we see our Budget Deficit grow to incredible numbers. The necessary spend by the Government injects money into an economy that cannot sustain itself. The Fiscal Policy impacts will be both short term and long term.
Our short term fiscal stimulus cannot go on for ever. While so many businesses have benefited from Jobkeeper, Cashflow Boosts and other stimulus measures, we know that this money is going to drop off at the end of September. It was always intended to be a short term fix. The way to build our economy is to create jobs. Infrastructure projects create thousands of jobs and we can see that this where the government will be focusing their longer term attention.
The construction industry are going to be the front line workers to drive our economy forward. Infrastructure projects require tradies, and plenty of them. There will be plenty of work but will you be in the right place to take advantage of this work? The demand for Tradies will be high but there is going to be a lag between now and these projects being in full swing. You need to be planning for this.
Unemployment is expected to reach 11% or higher in the next few months. That is an incredibly high rate, and few of us remember a time when unemployment was so high. People who are unemployed do not have the money for discretionary spending. This means businesses that thrive on discretionary spending will have less customers. In the next 6 months there will be many businesses that shut their doors. It is going to be brutal, extremely sad and stressful for everyone.
Your focus for the next twelve months will need to be the survival of your business. You should not expect to make extraordinary profits unless you are in an industry that is benefiting from the COVID-19 crisis. You need to buckle down and get your house in order so that you can make it through. Now is the time to think about the fundamentals of your business and go back to the basics so that you can be one of the surviving businesses at the end of all of this.
Just like the recession in 1990 and all the other recessions and depressions before them, the economy works in cycles and we will be return to a good place one day. Riding out the storm will be tricky but it could make you a better business owner as you face the challenges ahead. Read, learn, plan and adapt. Lets hope this crisis is over soon.