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Expect more big falls before we hit bottom

The share market has been relatively buoyant over the past few weeks despite the pall over business conditions and confidence. How long can that difference of outlook last?

Jennifer HewettColumnist
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The share market recovery over the past few weeks is welcome news for investors despite the extreme volatility testing nerves daily.

Yet what is happening in the market doesn’t seem to bear much relationship to what is happening to most businesses in real time in the real world.

Right now, business conditions in Australia, along with almost all other countries, indicate the bottom remains out of reach or even sight for most companies. 

Rising unemployment is just one aspect of that. Treasury’s estimate of a doubling of the jobless rate this quarter to around 10 per cent may well prove optimistic.

This would clearly have been far worse without the government’s JobKeeper wage subsidy of $1500 a fortnight for millions of workers, including those being paid to sit at home. More than 800,000 businesses have already registered.

Any increases in hiring to cope with lines outside supermarkets and busy hardware stores and the healthy balance sheets of the big miners still can’t match the greater downward pressures, particularly damaging for most retailers and service providers.


The outlook for the great majority of Australian businesses is also becoming grimmer by the day despite tens of billions of dollars of government assistance being shovelled into a flagging economy.

That translates into an ever greater divergence between relative buoyancy on the share market and largely unremitting gloom on the ground. How long that can be sustained is another exercise in guesswork.

So US markets staged their biggest weekly rally since 1974 last week, with the S&P 500 up 12 per cent, although gains were pared slightly on Monday ahead of quarterly earnings reports that will reflect the impact of COVID-19. The S&P/ASX 200 closed up again by nearly 2 per cent Tuesday, 20 per cent above its March 23 low.

Despite different circumstances and causes of today’s market volatility, however, the ups and downs of share prices still seem eerily similar to the pattern of the global financial crisis of 2008 and the meltdown of 1987. That suggests the prospect of more big falls before the bottom is finally reached.

Bottom out of reach

Goldman Sachs' US equities analyst David Kostin, in contrast, is suggesting the bottom might already have come and gone thanks to the “whatever it takes” approach of policy makers and the flattening of the curve.

The S&P 500 is now about 25 per cent above its March 23 low and only 18 per cent below its record high of mid-February, his analysis points out, despite the massive shock to the global economy.

But such confidence is conditional on Goldman Sachs’ assumption there will be no second wave of infections once the economy reopens. That is a very big assumption – even bigger than the untested faith in the ability of corporate America to come back strongly after being savagely shut down.


Right now, business conditions in Australia, along with almost all other countries, indicate the bottom remains out of reach or even sight for most companies.

Not surprisingly, business confidence suffered its largest ever decline in March, according to the NAB business survey released on Tuesday, and is now sitting at a record low.

According to NAB economist Alan Oster, business is essentially saying “trading conditions, profitability and employment all went backwards in a big way” last month.

“The decline in confidence was widespread across industries with most industries recording falls larger than 60 points. The decline in conditions was also sharp, and there may be more to come,” he says.

Unprecedented speed

An awful lot more, it seems. Business confidence fell to -66 index points while business conditions fell to -21 index points, slightly weaker than the global financial crisis but still well above the trough of the 1990s recession.

It seems only a matter of time until Australia breaks that unhappy record, too.

“We expect a recession of unprecedented speed and magnitude for the Australian economy over the next three quarters,” Oster adds. “This will see a sharp increase in unemployment.


“Policy makers have made a huge response that we think will be unable to offset the negative prints we will see in economic data in the near term but we are optimistic these actions will support a solid recovery once the virus is contained.”

As Scott Morrison keeps cautioning, it is too soon to count on the timing of any such containment despite the much better COVID-19 case numbers.

And despite increased urging for an easing of restrictions to urgently follow the improved numbers, establishing “the path out” is certainly not imminent. The national cabinet is due to discuss how and when to plan for this on Thursday.

That makes the most immediate worry for business the impact on cashflow given slowing sales or forced closures while most fixed costs remain in place.

“Without cashflow support, it is likely many businesses will be severely impacted and unable to return to operations once the economy begins to recover,” NAB says.

The rash of capital raisings and willingness of banks to offer cheap loans backed by government guarantees help cushion that – but cannot make up for extensive, continuing losses for many businesses.

An Australian Industry Group survey of its members is more evidence of the bleak result with chief executive Innes Willox warning it’s becoming harder to break even and businesses are bracing for things to get worse before they get better.

“The longer this goes on the harder the rebuild will be,”he says. “Clearly, too, the broader the lockdown the greater the economic damage. As activity and cash flows dry up, many more businesses will have to make hard decisions on staff and investments.

“The impacts to date are uneven across industries and, so far, more businesses in the industrial sectors of the economy are holding up than in the hardest-hit areas of the services sector such as hospitality, recreation services and, of course, tourism and education.”

So far.

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Summary | 6 Annotations
r to around 10 per cent may
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800,000 businesses h
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divergence between relative buoyancy on the share market and largely unremitting gloom on the ground.
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ll to -66 index points
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to -21 index points
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lightly weaker than the global financial crisis but still well above the trough of the 1990s recess
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