Disclaimers. I am not an economist (I think this is a good thing), and I am primary writing this article to clarify my own thinking around what the impact of lock-down caused by the coronavirus will have on the economy and I hope it helps structure the thinking in the wider public. As always if you have any questions about COVID reach out to me and I will try my best to help.

Summary

A lock-down will result in a material percentage of Australian Population being unable to work. For 1 in 10 households a lock down is likely to place them into Financial Stress.

COVID is an economic disruption there are real costs of not locking down with health care being overwhelmed and COVID death toll spiking by multiple percentage points. Likewise, there are real cost of a lock-down which society and the government needs to find a way of alleviating.

In my forecast 44% of people will not be able to work during a lock down and in one week this will cost six billion in raw lost productivity. An extended lock down will therefore have a prohibitive cost.

What does a lock down look like?

A lock-down is likely to be required if the COVID penetration reaches a point that hospitals are overwhelmed. If ICU beds are overwhelmed death tolls will spiral both within those effected by the virus (5% require ICU) and the general population who require ICU (i.e. if you have had a car accident). Sydney is literally days away from hitting this point.

The time that a lock down will be required for at this point unknown. China’s more draconian version has lasted eight weeks and is still going. Scott Morrison has talked about 6 months. UK modeling suggested an approach that could result in 12–18 months of semi-regular shutdowns to prevent hospital beds being overwhelmed. This is best emphasized by this chart that they produced

Basically, if as a society we intend to avoid overwhelming hospitals our expectation needs to be set for months of lock down time as opposed to weeks.

For modelling I am going to tailor around the Italy experience as opposed to the Chinese lock-down

What happens in a lock down?

On the most basic level large parts of our workforce will be restricted from doing their job.

Australia’s employment by Sector current looks like this

This totals 12.3 million jobs with an average weekly pay of ~1,300. All information has been taken from https://docs.employment.gov.au/system/files/doc/other/australianjobs2019.pdf

What Sort of Jobs will be impacted in a Lock-down?

In theory any job not counted as an essential service and where you cannot work from home will be subjected to the lock down.

This means when estimating job losses by the above categories you need to assess

1) Are they an essential service?

2) Can you work from home? (and if yes) whether demand will drop?

This sort of estimate is a judgment call and I have attached the spreadsheet I have used so you can play with the numbers if you disagree with my estimates.

My thought process is as follows

Essential services include

· Medical

· Defense, police

· Food — supermarkets, take away, supply chain

· Utilities Supply vs Charging (Electricity, water and maybe telecommunication)

For these roles there will be no job losses during a lock down period

For the remaining job categories, you are basically trying to estimate how many can work from home and how many can not and for those who can work from home how demand will change. For the legal category, solicitors will probably be able to work from home however I would expect demand for services will dry up and hence I have assigned a 75% work attendance during the lock-down. I have tried to be conservative and erred on the side of people being able to work.

Then for hospitality, Food Services and Tourism I have assumed 0 percent will be able to work as group however I have assigned 25% to some subcategories (Such as Chefs) because food delivery / food pick up restaurants are likely to keep functioning throughout a lock-down as they will be deemed an essential service.

Once we have assigned the number jobs we think will need to be suspended for the lock down we can review to see if it makes sense

From this chart we can see that Hospitality, Sales and Construction will be the sectors being estimated to be impacted the most. If different rules for the lock down are put in place, we can tweak the underlying model in order to determine the likely impact on jobs.

Number of Jobs Paused / lost

The simple model we have put is estimating that ~ 5 million jobs will not be able to continue during a lock-down which will impact 44% of the work force.

Using wage estimates from the same data source we can then estimate the weekly cost of a lock-down to be greater than six billion dollars.

This is the cost of people not working will be borne in some cases by the business and sometimes by the employee. The cost to the economy is the same no matter which party ultimate suffers the loss in $ terms.

Implications to the household

The lock-down estimated within the scenario I have constructed will ensure that 44 % of the workforce may be without an income for the period of the lock-down.

At this point it is worth utilizing the ME Bank Financial Comfort Survey which indicates only 4.82 households out of 10 would be confident in handling a financial emergency. This in turn suggests that losing weeks’ worth of wages could have severe impact on up to 1 in 2 households.

At a high level the following scenarios will exist

· Working — No financial impact everyone in household still works at normal level

· Not Working — No financial impact due to companies continued to pay wages

· Not Working / Working (Reduced hours) — Capable of handling a financial emergency

· Working (Reduced hours) — Incapable of handling a financial emergency

· Not Working — Incapable of handling a financial emergency

Sorting out the exact percentages in each category is beyond the resources I have available however 44% of households will be in the bottom 4 categories. The exact proportions in each category is dependent on the number of businesses willing or legally compelled to pay wages while their staff on leave.

From there you can do some estimates. 44% cannot work, if 50 percent are casual / don’t have holidays and lose there wage then 22% are in the bottom two categories. We also know 1 in 2 household are not confident of surviving a financial emergency then it is easy to imagine 11% ( 1 in 10) households could end up in financial stress as a result of a coronavirus shutdown.

This is material issue for the government to work out and may help to explain some of their apparent apathy to enforce an early lockdown to control the virus. It is likely the government will need to subsidize those who lose income and I would be keen to see everyone loses income during this period to get a proportion of there regular income supplied by the government up to a predefined cap.

Other costs to the economy

In addition to the direct cost of productivity in the wage space we are also going to see bankruptcies in both small business and larger businesses.

For a small business perspective, it is easy to imagine a shop in Westfields that is barely making ends meat due to staff costs, rents, bank costs going bankrupt due to the loss of 4 weeks of income.

For a larger corporation you can see similar issues playing out on a large scale and finally for larger institutions you can see their entire business being destroyed (i.e. air travel and hotels). The impact across the economy will be material above and beyond the direct productivity / wage cost impact.

Ways the Government could approach funding

The current framework that has been put in place is going to isolate those who own capital from the direct impact of the coronavirus.

If you are renting a house to someone then your income is currently protected.

If you are lending money to someone then your income (the interest you charge) is currently protected.

If you are charging for utility services (phones, electricity, water, gas) your income is currently protected

Consideration needs to be given to methods to spread the cost of this lock-down across the community as opposed to onto wage earners / tax payers only. This is a society level pandemic and I see no reason why someone who is earning a 1000 week working at bar should suffer a material cost and potentially personal devastating financial circumstances while someone who owns a house charging 1000 rent a week will not suffer any economic damage.

I am sure they currently have lots of very smart people working on this and I am not sure what I can personally add to the conversation. However, out of all the things out there to be focusing on, crowd sourcing this bit of the equation seems sensible to me. You need policies that avoid rorting, allow bad businesses to fail and keep afloat businesses that just need a bit of help till things normalize.

Conversations need to start shifting from shock into problem solving if we are to get through this pandemic in the best possible safe

Stimulus Packages

The government has announced two stimulus packages. These are primarily been designed to keep business afloat. At this point there has been no announcement of a package to subsidise the wages of people who can not work through a lock down however the government has talked about a need for further measures and these may be around this point if a lock down is announced.

Links

ME bank Financial Comfort Survey

https://www.mebank.com.au/getmedia/6859951b-0eb3-4360-a681-7e683bb267ed/ME_HFCR_Feb2020_17th-survey.pdf

Spreadsheet

Lock-Down Job Impact.xlsx