It has been about a month since my last update on Covid19 and the emergence of the delta variant. Without a doubt the NSW State government have made a mess of this in the last few months, somehow creating a worse outcome for both the health of the people and the economy.
It is clear that the only way out of long-term lockdowns is by getting the population as close to fully vaccinated as possible. In a perfect world, it would be 95% plus but it’s going to take too long to get to that figure before we end up with mass civil unrest and small businesses collapsing. I expect both NSW and VIC to end their lockdowns in November once over 70% of the population are fully vaccinated.
From an economic perspective, the prospect of the lockdowns ending is obviously good news. People can go back to work and companies can get on with doing business. If this all goes ahead, then we will likely see pent up demand for goods and services and a great Christmas period to boost the economy back into gear.
From an investment portfolio perspective, at the moment, the share market remains largely unaffected regardless of whether we are in lockdowns or not. In many cases, the large companies listed on the stock market are somewhat insulated and have diversified income streams from across the world. They have access to capital and the ability to negotiate favourable terms with suppliers due to their size and scale.
That is not the case for all businesses.
The area I am increasingly concerned about is small and medium sized business, the real engine room of the Australian economy. In my opinion, there is a growing risk to the entire economy emerging as small business continue to be neglected by all sides of politics while bearing the brunt of the impact from lockdowns. They have neither the voice of unions like workers nor the deep pockets of the corporates.
Extended lockdowns for any reason, be it lower vaccination rates, materially higher ICU and death rates, or a new variant, will be a problem for many businesses already on the edge.
These businesses depend on local customers and have neither the size nor scale to access capital or negotiate favourably with suppliers when in trouble. They are increasingly finding themselves at the mercy of their banks and their landlords, both of whom are effectively accumulating unpaid interest and rent as debts. Small businesses have no leverage in this situation as it plays out.
It doesn’t show up as a problem at the moment because the banks are capitalising the interest and using it to increase their loan book. Landlords in many cases are accepting whatever the small business can pay as rent and accruing the unpaid rent as a debt. It all looks good on paper. At some point, the reality is that these amounts need to be paid.
When this side of the equation starts to play out it will be a problem. If small businesses are left with nowhere to turn then many will go broke. It’s that simple, it becomes their only option.
If there is a material spike in small businesses collapsing in the months ahead then there is the very real possibility that this leads to flow on effects for almost everyone; for the economy, unemployment, the property market, the banks and ultimately the big corporates listed on the stock market.
Significant economic problems always seem obvious in hindsight. Usually, they seem to come out of left field because everyone is too distracted or complacent to spot the real problem emerging. For years governments across the world have bailed out the biggest institutions because they are too big to fail. However, if we are not careful, it will be our disregard for small businesses that will be our economic downfall.
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