COVID-19, The Economy, Unemployment and Government Initiatives

The continuing employment and pay impact of COVID-19 on the world of business and in particular, employees across all sectors though generally excluding the public sector has been profound with governments mandating changes to the manner in which the workforce is deployed (including person-to-person distancing initiatives) and in many cases either substantially constraining or temporarily discontinuing “business as usual”.

The impact of COVID-19 on the airline, tourism, travel, hospitality, media, sport and discretionary retail sectors is dramatic.

Discretionary retail outlets in all towns and cities across the nation have shifted to become customer-free zones.  This has caused a particularly long period of hardship for retail in many regional areas across the country which were still reeling from the impact of bushfires over the summer period prior to the emergence of COVID-19.

The pandemic’s social distancing requirements are also having a direct impact in the education sector, highlighting the under-preparedness of many households, institutions and organisations to step up to the technological fundamentals essential to enable employees and students to work from home as circumstances now demand.

The share market gains of the early part of the first quarter of 2020 saw a number of positive features including the securities market in the first two months.  However, these gains have been severely impacted by COVID-19.

While employment showed signs of growth at the beginning of the quarter, it is highly probable that by the end of the second quarter the unemployment rate will have reached ten percent or approximately twice the February rate.

We understand that many economists are talking about a significant decline in the June quarter GDP on a global footing.  This, of course, is subject to the uncertainty associated with the containment of COVID-19 and the management of the health system and those affected over the coming months.

We note in recent releases that banks have predicted the unemployment rate would jump to between 11% and 12% over the coming three months with the economy headed for its most significant short-term contraction on record. A recent SMH article (23 March 2020) suggested that “more than 2 million Australians could be out of work…. on 26 March another article postulated a future 15% unemployment rate. The Bankwest Curtin Economics Centre predicted 11.1% as early as August increasing to 12.7% in May 2021 the highest rate since unemployment reporting in 1978.

These predictions which an increasing proportion of the population are becoming aware through personal experience have led to a circumstance where consumer confidence is at levels not experienced since the last recession in the 1990/1991 years.

Westpac’s Chief Economist, Bill Evans, was reported as indicating that the economy was likely to shrink by 3.5% or about $16 billion through the same period, reflecting that it would represent the worst performance since the Australian Bureau of Statistics published quarterly GDP measurements in 1959.

Other bank economists concurred while also revealing a high degree of variability in credit card expenditure, with spending on food significantly up on the same period last year, together with medical care and health expenses.

Notwithstanding, most of the financial sectors’ economists are of the view that household consumption will decline, arising substantially from the social distancing regulation which the government has imposed.

As a consequence of Federal Government initiatives its 2020 financial year budget, instead of achieving its originally foreshadowed $5 billion surplus could record a $90 billion deficit before blowing out to $160 billion in the 2021 financial year.

Overlaying the obvious industry challenges is government policy, on the one hand endeavouring to curtail commercial activity while concurrently providing money for significantly affected industry sectors, small business and the unemployed, with the Reserve Bank also contributing support for the provision of low interest rate loans, some capable of forgiveness and others embracing long-tailed deferral of debt in order to keep the economy operating.

The duration of a number of these initiatives will be strongly influenced by the duration and extent of the pandemic and the time it takes industry to create profitable economic activity and fill the supply chain to support the domestic community’s needs and export opportunities.

At the time of preparing this report, reflective of the impact of the global pandemic are the decisions made by our two leading airlines – Qantas, which have suspended international flights and reduced domestic flights by 60%, standing down 20,000 of their 30,000 staff.

Virgin, just prior to announcing their entering into voluntary administration on 21 April, had cancelled all international flights and 90% of domestic flights had stood down 8,000 workers with more than 1,000 of those workers losing their jobs permanently.  The CEO also revealed that all pilots at its budget arm, Tiger Air, would be made redundant as part of the layoffs.

Flight Centre, a key success story in the travel sector, has stood down 6,000 of its sales and support staff globally. We understand that a proportion of this group will be made redundant. In Australia we understand that around 3,800 of these staff will temporarily stand down.  We understand that Flight Centre are likely to also close up to one hundred of their underperforming stores and most recently cancelled their interim dividend to save around $40 million. In a related context we also note that it was recently announced that Helloworld Travel will be terminating 275 people across its global network and standing down another 1,300 employees.

We note in mid-April that Crown Resorts had stood down 11,500 employees and given permanent workers two weeks’ pay and casual workers a $1,000 lump sum with all employees able to access leave entitlements.

At the same time, Crown revealed a very strong balance sheet and a commitment to continue with the construction of Crown Sydney at Barangaroo. The company also announced that Directors and senior management would take a 20% cut in their fixed remuneration and fees through until 30 June 2020.

Another sector illustration is Star Entertainment which have stood down the vast majority of its 8,000 plus workforce (90% of staff) following the closure of its food, beverage, conferencing and gaming facilities across their Sydney, Gold Coast and Brisbane venues.  We understand that staff will be provided with two weeks of paid “pandemic leave” and employees will be able to access any accrued annual leave and long service leave entitlements.

We note that the Board and senior managers of Star Entertainment will also forego a proportion of their fees and salaries.

Remaining in the hospitality and accommodation sector, with the significant decline in tourism internationally and domestically, hotels are also experiencing a significant decline in revenue with many foreshadowed guests cancelling their bookings.

We note that the Chief Executive of Tourism Accommodation Australia has indicated that with Australia’s international borders effectively closed, the sector would lose more than nine million guests a year which will be further added to by recent government announcements curtailing domestic travel.

We understand that the hotels sector has called on the Federal Government for a relief package and has indicated that over 300,000 jobs are at risk. We also note that a number of hotels are providing temporary accommodation to travellers quarantined and other disadvantaged citizens as a result of the pandemic.

In the field of sport we note that the A League, Rugby Australia, AFL and NRL players will be asked to take a significant pay cut to ensure the survival of their sport as a result of the pandemic.

We further note that Rugby Australia will stand down 75% of its staff for a three-month period from the beginning of April.

In any event, in the current circumstances, both NRL and AFL players will experience a significant loss of income over the balance of the scheduled playing season. We also note that Cricket Australia staff and players will be also take a pay cut. We understand that motor sport is also affected on a global footing and that the 2020 Olympic Games have been deferred until 2021.

In the Media sector we note a recent report that Seven West Media has advised staff earning between $80,000 and $200,000 annually that their work week would be reduced to four days along with a 20% pay cut until June 30. Management earning above $200,000 would also face a similar pay cut though not reduced hours. Reduced pay was also announced by News Corp and Southern Cross Austereo.

In the real estate and building sector, the developer, Mirvac, and the shopping centre landlord Scentre Group, both announced that their Boards and senior executives would reduce their salaries by 20% in response to the COVID-19 crisis.

In the retail sector, we also note that Premier Investments, whose key brands include Smiggle, Peter Alexander, JayJays, Just Jeans and Portman’s, has temporarily closed a significant number of their retail outlets until late April, standing down more than 9,000 staff worldwide.  They have also indicated to their landlords they would not be paying rent during the shutdown.

In their announcement, Premier Investments also revealed that they would stand down their entire executive team who will work from home during a period for either no pay or for reduced leave entitlements.

At the time of preparing this article, Myer have announced that it will close sixty stores for at least one month and stand down 10,000 staff during a shutdown it expects will last at least until 27 April 2020.

When announcing store closures Myer revealed that retained business-critical roles will work on a reduced salary (80%).  They further revealed that Myer Executives, including the Chief Executive Officer, will not be paid during the closure period.

Myer revealed that as team members will not be working, they will not be paid during this period of imposed closure, though reveal that full-time and part-time members have greater flexibility to access their annual leave and long service leave entitlements in addition to government assistance measures.

Also in the retail sector, we note that Lovisa will close the majority of its 400 stores across the globe and stand down its entire retail workforce.

We equally note that Accent Group, whose brands include Athlete’s Foot and Platypus, will shut its doors and stand down around 5,000 staff for four weeks.

We note that the Retail Apparel Group, which owns brands such as Tarocash, YD and Connor will also close over 500 stores at the close of business on 27 March, standing down 3,000 employees.

Other retailers announcing shutdowns or significant curtailment of their operations include General Pants (150 stores), Michael Hill Jewellers (165 Australian locations), Mosaic Brands (1,400 stores), Cue Clothing and Veronica Maine, Adairs (160 stores and 2,000 staff) and Kathmandu.

On a positive note, we came across a service from AppellonSelf Connect represents an eight-week online course which will give individuals the tools to manage and control how they are feeling and reacting to what is happening around them.

On a further positive note we understand that the major food retailers and distributers are increasing their employee numbers in order to meet the increased demand for many consumer staples.

In the education sector State governments, with Federal support are recommending school closures. We also observed in parallel that the Early Learning and Care Council of Australia revealed an expected mass closure of childcare centres as unemployed parents are unable to pay fees.  We note, subsequent to these observations, that the Prime Minister announced a free childcare program for Australian parents during the COVID-19 crisis.  We understand that the government have established a $1.6 billion temporary package which would not be means tested and would replace the current childcare funding platform for the duration of the pandemic.

The outcome of this initiative will be that parents will receive free childcare.   Government sources revealed that 60% of a childcare centre’s costs were wages and the Job Keeper subsidy will support the sector to the tune of over $1 billion. We further understand that the government will work with one or more private providers where income may exceed $1 billion in order to ensure universal application of the offer to parents who remain employed.

We also note that the Federal Minister for Health, Greg Hunt, recently announced a deal to integrate private hospitals with the public health system, adding 34,000 beds and guaranteeing the viability of the private sector that was clearly under strain after non-urgent elective surgeries were banned. We further note that State governments are intimately involved in negotiations with the private hospital sector as health is operationally under the direction of State governments.

Under the Job Keeper construct every unemployed person will receive $1,500 a fortnight, that includes casuals that have been working for 12 months and may only be earning $300, $400, $500 a week so they receive more than they were paid when they were working.  The complications with implementing inequitable Job Keeper payments were not resolved at the time writing this article where record keeping and the power to make determinations was under the stewardship of the Commissioner of Taxation.

A comprehensive summary of this initiative is provided by Harmer’s Workplace Lawyers and MinterEllison in their recent articles, JobKeeper Amendments to the Fair Work Act and COVID-19 Guide to the Federal, State and Territory Support Packages for Business respectively.

We also observe sole traders and small businesses who are being impacted as a result of COVID-19 will be supported by the Federal Government’s Job Seekers’ New Start Allowance which would be doubled and made available to casuals and sole traders with both the assets test and waiting period waived.

We also noted that sole traders would be able to access $10,000 of their superannuation this financial year and another $10,000 next financial year tax free if their turnover decreased by a minimum of 20%.

Under the SME Guarantee Scheme, businesses can gain access to working capital where the government will guarantee 50% of new loans issued by approved lenders.

We understand that the federal government have decided to freeze wage increases for APS Employees for the next six months (April to October 2020).  We understand that the Community and Public Sector Union has not been supportive of this initiative, commenting that the wage increase for federal public servants is only 0.058% of the government’s budget.

We observed that in early April, the Fair Work Commission announced its intention to vary more than one hundred modern Awards to insert new provisions in response to the COVID-19 pandemic, as outlined by Gilbert+Tobin in their recent article..

We note that the International Monetary Fund (“IMF”) has warned with unemployment to remain high for at least two or more years in the wake of the pandemic, that the Australian economy will contract by 6.7% in the 2020 calendar year or almost $130 billion.

The IMF state that it would be the single largest hit since 1930 when the economy is estimated to have contracted by 9.5%. Notwithstanding, the IMF indicated that the economy will grow by 6.1% in the 2021 calendar year.

The IMF’s forecasts for Australia, New Zealand, the US and the UK in relation to GDP and unemployment are set out in Table 1.

Table 1

The Australian Treasury’s modelling has revealed that Australia’s unemployment rate is likely to peak at 10% in the June quarter, though believe that its Job Keeper program will contribute to both containing and reducing that level of unemployment over the balance of the 2020 year. Australia’s unemployment rate increased marginally to 5.2% in March, clearly not reflecting the impact of many employers’ response.

Table 2

The ABS revealed that 20,300 people lost work in the month to mid-March compared to economists’ expectations of an unemployment level at the end of March of 5.4%.  Unemployment levels varied by State – see Table 2.

The ABS’s statistics reveal that since March 2019 full time employment had increased by 91,700 and part time employment by 136,000.

While the data reveals only a modest impact of the pandemic, April data revealed significantly higher levels of unemployment and underemployment.

Advertisers revealed a significant decline in job advertisements over the quarter by March end.

Following the March disclosures the ABS revealed in the week commencing April 20 based on ATO data  that around 780,000 jobs were lost (6% of the workforce) after the introduction of social distancing laws (March14 to April 4). The greatest decline in employment was in the accommodation, food services, arts and recreation sectors.  In commenting on the loss of jobs the Governor of the Reserve Bank revealed that the Australian economy could shrink by 10% in the first six months of 2020.