Aug 04 2020
The implementation of Stage 4 restrictions in Victoria, including a nightly curfew and unprecedented curtailment of economic activity, is set to have a major and long-lasting impact on both the Victorian and national economies.
The economic impact in Victoria
In Victoria, 250,000 employees are expected to be stood down this week. This figure is in addition to the roughly 250,000 Victorians who have already lost employment since the emergence of COVID-19 in February 2020. While the original loss of employment was primarily concentrated in hospitality and tourism industries, the latest job losses are far more widespread. The imminent job losses will be concentrated in the retail, wholesale, construction and manufacturing divisions, which accounted for 58.7% of Victoria’s Gross State Product (GSP) in 2018-19. Over 500,000 Victorians are already working from home, and 1 million teachers and students will not attend school throughout the lockdown period.
An economic update provided by the Victorian Government in late July 2020 outlined an expected budget deficit of $7.5 billion in 2019-20, down from a $618 million surplus originally anticipated for the year. The update also predicted a 5.25% GSP decline for 2020, and a 6.25% recovery in 2021. However, these predictions were predicated on a six-week Stage 3 lockdown through to 20 August 2020. The implementation of the far-reaching Stage 4 restrictions through to mid-September is expected to cost Victoria between $20 and $25 billion. Victoria’s GSP is estimated to be about 14% lower in the June and September quarters relative to forecasts in the 2019‑20 state budget, dropping $55 billion over an 18‑month period.
Many large national retailers no longer qualify for JobKeeper, forcing their Victorian employees to rely on accrued leave or JobSeeker support throughout the six-week lockdown. Wesfarmers’ major brands including Kmart, Target, Bunnings and Officeworks employ over 25,000 in Victoria, and are not eligible for JobKeeper support.
The effects of the Stage 4 lockdown will extend far beyond the next six weeks. Gaps in supply chains caused by the latest restrictions on the Manufacturing sector are likely to be met by interstate companies. While this resolution will alleviate the national implications of the Victorian lockdown, it will also lead to a permanent loss in market share for Victorian enterprises to interstate competitors.
The economic impact across Australia
The loss of economic activity across most Victorian industries is a devastating blow for the Australian economy. According to SGS Economics and Planning, Melbourne alone accounted for 39.8% of national GDP growth in 2018-19. Melbourne contributed the most growth across all regions of Australia, and achieved the highest growth on record in that year.
The second wave of COVID-19 has delayed interstate travel resumption, with border restrictions still enforced for most states and territories. Plans to implement an international travel bubble with New Zealand have been effectively abandoned, extending the economic pain for the Tourism industry. The second wave has also weighed on consumer sentiment and business confidence across Australia, stifling a modest recovery exhibited in employment from late April to early June 2020.
According to the Australian Prudential Regulation Authority, $274 billion in loans were granted temporary repayment deferrals as at 30 June 2020, equivalent to 10% of all outstanding loans in Australia. Close to 17% of all loans to small businesses were deferred, and 11% of all housing loans. These measures are expected to rise significantly through September in response to the Stage 4 restrictions imposed in Victoria, placing further pressure on the National and Regional Commercial Banks industry.
Projections released by the Federal Government on 23 July outlined an estimated $184.5 billion deficit in 2020-21. The implementation of Stage 4 restrictions in Victoria is expected to significantly worsen this forecast, particularly as Victoria accounted for 23.7% of Australian GDP in 2018-19. National GDP in the September quarter is expected to decline by 5.0%, primarily as a result of Victoria’s stronger lockdown restrictions. Additional business support measures have been announced by both the Victorian and Federal Governments, including up to $20,000 for businesses forced to close and $1,500 in pandemic leave support for employees forced to self-isolate.
If successful, Victoria’s struggle against COVID-19 could leave all of Australia with minimal active COVID-19 cases heading into the final quarter of 2020. This outcome would position Australia for a strong rebound in economic activity in 2021. However, state governments will likely be cautious in relaxing restrictions, given the hard lessons learned by Victoria’s failure to contain the virus.
Industry impacts of Stage 4 restrictions
The IBISWorld COVID-19 Impact Tool (available on MyIBISWorld) can aide in understanding the impact of the latest restrictions on industries and supply chains. The tables below illustrate the most significant Victorian industries likely to be disrupted by the Stage 4 restrictions.
Essential retail industries, including food, medicine and utility retailing, will remain open throughout Stage 4. Virtually all other retail activity will transition to online delivery and contactless pick-up operating models throughout the six-week period.
The Stage 4 restrictions are expected to permanently shift the operations of enterprises across the retail sector. Consumers who have never had to buy goods through the Online Shopping industry will have no choice over the next six weeks. This trend is expected to accelerate the long-term transition towards online shopping and click and collect services, rather than traditional in-store commerce. Online shopping has increased since the first wave of COVID-19 in April 2020. An average of 1.6 million Australian households bought something online each week in 2019; in April 2020 this figure increased to 2.5 million households per week. Victoria exhibited the strongest increase in online shopping behaviour, and Victorians are expected to continue taking up online shopping throughout the Stage 4 lockdown.
In 2018-19, the Construction sector accounted for 7.8% of Victorian GSP, or approximately $34.8 billion. In May 2020, the sector employed over 300,000 Victorians, accounting for close to 9% of all employment in the state. Under the Stage 4 restrictions, large scale construction projects will be reduced to 25% of their normal workforce. Small construction projects will be limited to a maximum of five workers on site. Employees will be restricted to working on a single construction throughout the six-week period, significantly hindering contractors that typically move between projects. Furthermore, construction will be limited to existing projects, with no new project commencements with the exception of essential infrastructure. Critical repairs to residential premises for emergency or safety will also be permitted.
The Construction division is expected to decline by 4.0% in 2020-21, following a decline of 5.1% in the prior year. While construction activity will be significantly reduced throughout the six-week period, activity is expected to rebound in the final quarter of 2020.
Manufacturing in Victoria accounted for close to 13.0% of GSP in 2018-19. Several key manufacturing industries will be closed under the Stage 4 restrictions in metropolitan Melbourne, while others will move to restricted operations. In particular, meat product manufacturers will be subject to tough restrictions, following significant COVID-19 outbreaks at these facilities in recent months. These facilities will reduce output by a third, only allow employees to work at a single establishment, and workers will be required to wear personal protective equipment similar to hospital staff.
Ancillary businesses involved in manufacturing equipment, goods or services necessary for the operations of essential supply chains, such as food, utilities and medical items, will be permitted to continue operating with minimal employment. Victoria accounts for close to 30% of Australia's food and fibre supply. Some transport equipment manufacturing that is permitted to continue includes parts manufacturing for public transport services and the continuity of essential services such as food transport.
The long term risks for Victorian manufacturing are high, given the potential for downstream markets to pivot to alternative product suppliers during the six-week lockdown. The recovery of Victorian manufacturing is expected to be subdued, relative to other divisions in the state.
The Wholesale division will be significantly curtailed by the Stage 4 restrictions. Wholesale trade, unrelated to food and medical supplies, will cease except where trading is critical to essential supply chains. Wholesaling of motor vehicles, furniture and commission-based goods will be banned. Grocery, liquor and tobacco wholesaling will be permitted to continue. Warehousing and distribution centres in Melbourne will be limited to no more than two-thirds the normal workforce allowed onsite at any one time.
For access to IBISWorld’s COVID-19 Impact Tool, or reports mentioned in the impact tables above, contact your account manager.
For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647