CRISIS AVERTED...BUT AT WHAT COST?
by Schon G Condon RFD
Exactly one year ago, it appeared that the global economy was going to fall into a “zombie-filled abyss” due to the pandemic. However, with the International Monetary Fund (IMF) forecasting 6% growth this year (and 4.4% in 2022), it means that the predicted economic catastrophe has been averted…but at what cost?
Conservatively speaking, the IMF’s estimate of the fiscal responses of Governments worldwide to the pandemic is around $20 trillion, and this is a number that is still rising. The impact is that there has been a surge in global debt as Governments, businesses and households have had to borrow more. So, whilst the global economy has bounced back far more quickly than anyone could ever have predicted, this recovery is being funded by one thing, and one thing only – debt, and more debt at every level.
Australia has been no different, with the big banks deferring loans to businesses and households, and the Government spending billions on both JobKeeper and JobSeeker, as well as other initiatives. But the question remains: have these massive injections of financial support averted the economic threats, or simply deferred them?
Both locally and globally, the number of bankruptcies since the start of the pandemic have fallen well short of the tidal wave that was expected, and while the RBA is reporting that insolvencies rose steadily towards the end of 2020, I can speak from personal experience that they’re still occurring at well under half the rate experienced in 2019 for example. This is due to three underlying factors: – the ample supply of credit, unprecedented fiscal support, and an ongoing disinclination to pursue recalcitrant debtors.
Whilst this has prevented more insolvencies in the short term, it has also increased the general level of ‘indebtedness’, according to a recent report from The Bank for International Settlements (BIS). Their research has found that the proportion of “zombie companies” in developed economies was up from a pre-COVID 4% to about 15%; and in countries like Australia, it’s now about 25%. This big increase in leverage in companies incurring losses, rightly leaves the BIS uncertain as to whether insolvencies have been avoided – or just postponed.
In Australia, there’s no doubt that many companies were effectively being kept on “life support” with low interest rates, bank deferrals, and programs like JobKeeper. But these companies end up investing less, employing less and contributing less to the overall health of our economy. Therefore, the “cost” of averting this economic crisis (both literally and figuratively), will no doubt be felt for many years to come.
The even greater impact of concern is the real potential that this increasing group of ‘zombie entities’ could well ultimately take down many presently solvent entities that may not be able to sustain the ultimate collapse of the ‘zombie entities’.
Schon is the Managing Principal of Condon Advisory Group, a national firm of Forensic Accounting, Solvency and Turnaround Practitioners. He has dedicated the past 40 years of his working life in the Greater Western Sydney region, helping the community and businesses to grow.