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Australia / Coronavirus Insights
Low Point: Economy Begins the Climb Out of COVID-19 Recession

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by IBISWorld
Sep 07 2020

Australia is now eight months into the COVID-19 pandemic, and the economy has had time to adjust to the new normal. New data has revealed how different industries are performing, and the expected performance of the economy in the month ahead.

The chart below highlights the revenue change of businesses in each economic division. Immediately noticeable is the large share of businesses across most divisions that have reported lower revenue in August 2020. Much of this decline is attributable to the implementation of Stage 4 restrictions in Victoria. Sectors that rely on in-person interaction have been significantly affected, while sectors that have been able to easily move their operations to working from home, such as Finance, have reported lower revenue disruption. On average, 40% of businesses reported lower revenue in August, while 16% reported a revenue increase. The increase in revenue across many divisions has been driven by a relaxation of COVID-19 restrictions (outside of Victoria).

Looking forward, the same businesses surveyed for the chart above have shared their expectations for the next month. As shown in the chart below, fewer businesses across the economy expect revenue to decline in September 2020. More businesses expect revenue to stabilise or increase. Notably, the number of businesses that are not sure about their revenue expectations for September is significant across every division, indicating that the ongoing uncertainty is making it difficult for businesses to commit to investment in productive capacity. State restrictions, including border closures, are likely driving this trend of uncertainty. Over the next quarter, states are anticipated to gradually roll back restrictions and restart their economic engines. Growing pressure from the Federal Government on the state and territory governments is also likely to contribute to a faster rollback of restrictions.

The chart below shows the ability of businesses to meet their financial commitments over the next three months. Immediately noticeable is the extreme circumstances of the Accommodation and Food Services division, where over 70% of businesses expect to encounter difficulty with meeting financial commitments. Industries in this division, such as Hotels and Resorts and Serviced Apartments, have now suffered close to half a year without revenue from international tourists. In addition, interstate travel restrictions have also offset any revenue previously derived from domestic travellers. The number of Motels in Australia is expected to decline by 7.5% in 2020-21, and the number of motel employees is expected to decline by 20.4%. Many of these businesses will likely permanently leave the industry, with the number of industry enterprises remaining below the peak of 2018-19 throughout the next five years.

Similar circumstances are also apparent in the Transport, Warehousing, Arts and Recreation divisions. Fortunately, these divisions are likely to report a revenue rebound as domestic travel and public assembly restrictions are eased in coming months.

Capital expenditure outlook

The chart below outlines business capital expenditure expectations over the next quarter. Current economic disruption is clearly evident, as virtually every sector has most businesses cancelling or postponing capital expenditure, or never pursuing it initially. According to the latest estimates from IBISWorld, private capital expenditure is expected to decline by 5.1% in 2020-21, following a 9.7% decline in 2019-20. Although this decline is significant, a rebound of 6.8% is anticipated in 2021-22 as normal economic conditions return. Of particular note is the extremely small share of retail businesses that are increasing capital expenditure. Negative consumer sentiment is weighing heavily on household consumption expenditure, dissuading retail industries from investing in new productive capacity. Consumer sentiment is expected to remain negative until 2022-23, leading consumers to allocate their income towards savings or the reduction of debt, rather than consumption expenditure.

Victoria restrictions outlook

The current release of the Victorian Government’s roadmap to return to normal operating conditions is a negative sign for many businesses, particularly those in the Restaurants, Cafes, and Pubs, Bars, and Nightclubs industries. Under the announced measures, these establishments in metropolitan Melbourne will not be allowed to reopen for outdoor dining until 26 October, assuming that the statewide average for new cases is under five for the preceding fortnight. Patrons will not be allowed to dine indoors until 23 November at the earliest.

Under the Victorian reopening roadmap, the first businesses to resume operations from 28 September will be in the Construction, General Warehousing and Cold Storage, and Postal Services sectors, as well as numerous industries in the manufacturing and wholesale sectors. Reopening will come with significant constraints, including limits of workers onsite where possible, as well as workplace bubbles across sites. To lower restrictions on 28 September, the daily case count in Melbourne will need to be between 30 and 50 if not lower for two weeks. As at 7 September, the average case number for Victoria over the prior two weeks is 96. To move to lighter restrictions by 26 October will require daily case numbers under five for the prior two weeks.

The Victorian Government is expected to be conservative in the speed at which restrictions are lifted. If restrictions are removed too quickly, the potential impact of a third return to lockdown would be devastating for both the state and the national economy. As shown in the chart below, Victoria’s rebound in employment and wage payments has already significantly lagged behind the recovery in the rest of Australia. As at August 22nd, payroll employment in Victoria was 7.9% below the level reported in mid-March, compared with 2.9% for the rest of Australia.

While significant restrictions remain in place, industries are showing the first signs of turning their focus away from ‘survival’, and towards recovery. GDP is expected to contract by 2.7% in 2020-21, but is expected to be followed by a 4.7% rebound in economic activity in 2021-22. Although industries will certainly benefit from a lift in restrictions by Christmas, the associated reduction in government support will present a significant challenge to many struggling businesses in the months ahead.

IBISWorld reports used to develop this release:

For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647