Australia’s Zombie Problem

Whilst all eyes are on Melbourne as the epicentre of economic hardship on the back of the new lockdown on this second wave, Queensland is most certainly not out of the woods despite the perception of life as normal again.  Yesterday the Courier Mail revealed the results of a business survey that found 1 in 5 Queensland businesses were running as ‘zombie’ businesses that would collapse within 3 months of government support measures being removed.

A zombie company is generally defined as one whose income solely pays the interest on the debt it has and not repay the principal nor distribute profits.  Technically they are insolvent.  That 20% of businesses put themselves in this category must be cause for great concern given the results come whilst Queensland largely enjoys an open economy, albeit still with considerable restrictions for restaurants and bars etc, and of course a tourism industry shutoff from large sections of Australia.

ABC’s chief economist, Alan Kohler, delivered a sobering analysis yesterday with estimates of as many as 100,000 businesses to go broke.  Via MacroBusiness:

“The Corporations Act was amended at the same time as JobKeeper was brought in March to allow businesses to trade while insolvent for six months. It’s usually an offence. And that ends on September 25th.

“Demand for air travel and tourism has virtually collapsed. And that has virtually disappeared…

“There are thousands of businesses that depend on people travelling. Like retail, restaurants, security firms and caterers…

“But other private data is showing that trouble is brewing more broadly. The average delay in paying invoices across all industries has blown out from 11 days to 49 days…

“Basically, the safe harbour amendments is keeping thousands of zombie businesses from going to the wall until September the 25th.

“Insolvency practitioners say they are bracing for a tsunami of insolvencies after October. One told me he wouldn’t be surprised in 100,000 businesses went broke…

“Insolvencies caused from the GFC peaked in 2012, four years later. And that’s what always happens. The average time between a business going insolvent and admitting it is 18 months…

“There’s going to be a long, catastrophic wave of insolvencies that will lead to higher unemployment and pressure on the banks.”

The depth and drawn out nature of what this recession is likely to be is the key message for the V shape believers.  Whilst Australia is certainly in a recession after 2 consecutive negative GDP prints in Q1 and Q2 of this year, many are hoping for a strong Q3 print.  Remember too, it is much easier to turn positive off such a low base as was left after Q2, but regardless there are growing concerns even this may not eventuate.  The NAB business survey is one of the key reports economists look to and yesterday the NAB chief economist warned a Q3 bounce is too early to call.  From ABC News:

“"In terms of sharpness in the decline in activity, this makes the recessions in the 80s and 90s look like child's play," Mr Oster says.

"Unemployment did get to 11 per cent in the 1990s recession, but it took two years to get there."

National Australia Bank will update its forecasts next week after the results of its latest business conditions survey.

But Mr Oster already knows what to expect.

"I would expect conditions, or certainly confidence, to go deeply south compared to where it was," he says.”

NAB downgraded its GDP forecast for Q3 to just 1% (again off a very low base) on the Federal Government's July Budget update.  That leaves very little room for further deterioration and Victoria, a quarter of Australia’s GDP, has them unsure we won’t see a 3^rd consecutive quarter of negative growth.  The same article has the Grattan Institute and Deloitte Access Economics predicting we could see a full year of recession, something not seen since 1982.

This of course plays out without enough people actually understanding the implications.  Everyone knows of someone who has withdrawn their super and spent it on toys or living large on a high wage from the Government than they received prior.  Ask any motorcycle or jetski shop.  The perception that this is somehow not real or the government will somehow keep up the helicopter money indefinitely is setting up many for a bigger fall then would ordinarily happen.

The line up to enter our store and unprecedented online orders suggest there is however a growing number of people starting to understand how this could all end and moving to protect themselves.  Increasingly too we are seeing many older customers looking to protect their children, adult and kids alike.  Every extension of handouts, every extension of business support, and every extension of home buyer grants just kicks the can down the road for the next generation to deal with.  The gift of gold could be the greatest gift a parent could give.