16th April, 2020
With COVID-19 worsening Australia’s economic prospects, measures are now in place to throw small and medium businesses (and the economy as a whole) a financial lifeline through Quantitative Easing. But what does that mean?
It’s safe to say that the Australian economy is going through a rough patch.
According to new statistics from IBISWorld, unemployment is expected to rise from 5.3 percent in 2019-20, to 8.4 percent in 2020-21, with a forecasted peak of 9.5 percent by 2021-22.
Today, the ABS confirmed unemployment has held at 5.2 percent in March, up from 5.1 percent (seasonally adjusted) in February, yet the SEEK Employment Report reveals job ads are also down 33.9 percent year-on-year, meaning IBISWorld’s forecast could come true.
The queues out the front of Centrelink office leave little doubt in most economists’ minds that Australia is already in a recession. The first, strong indicator of this recession will arrive with the June GDP figures, but the technical definition for a recession won’t be met until September (following two quarters of negative economic growth).
It’s hardly surprising, then, that The Economist Intelligence Unit recently forecasted nearly all of the G20 economies will be pushed into recession as a result of COVID-19.
Fully aware of the financial woes that have beset Australians, the Reserve Bank of Australia (RBA) has announced the introduction of Quantitative Easing, a financial lever designed to incentivise investment.
MYOB economist Jon Manning told The Pulse that Quantitative Easing is a legitimate tactic for the RBA to pursue in the current economic climate.
“With the RBA having already reduced interest rates significantly over recent years, they’ve hit the limits of what’s possible to stimulate the economy with this tool,” said Manning.
“Quantitative Easing (also known as QE) is the next most likely tool they can consider to enhance their monetary policy.
“As a lever to stimulate economic activity, it’s been pursued in both the US and the UK in recent times, and may continue to be a part of their agenda there as well.”
Although it’s been a bit of a hot topic at the moment, the mechanics of Quantitative Easing aren’t exactly clear for many business owners. Read on to learn what it’s all about.
Quantitative Easing is a way for the RBA to influence interest rates by buying Australian government bonds. In doing so, the RBA expands Australia’s digital currency (they can buy as many bonds as they want), which is why Quantitative Easing is often likened to printing money.
In simple terms, a bond represents a loan that the bond purchaser provides to the seller of a bond. If someone were to purchase a bond from the Australian Government, they would effectively be loaning the Government money.
In short, it’s an effective way to boost the entire economy. When buying government bonds, the risk-free interest rate affects all asset prices and interest rates in the entire economy, rather than any one specific private asset market.
The more Government bonds the RBA purchases, the more valuable those bonds become.
Because bond interest rates fall as the price rises – and vice-versa – the RBA can cause interest rates across the entire economy to fall.
Lowered rates should then lead to greater borrowing and investment across Australian industries, creating employment and the economic growth necessary to get us through this slump.
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Although a steady decline in loan interest revenue (and deferrals of mortgage and loan repayments) has put a hole in the profit margins of banks, the new Quantitative Easing measures allow banks to borrow on top of existing outstanding credit to Australian businesses and households.
In theory, Quantitative Easing should result in an increase in banks providing short-term bridge loans for small and medium enterprises.
To further incentivise these small business loans, new money “printed” by the RBA will fund a new lending facility for banks to provide more than $90 billion worth of three-year, low-interest loans to SMEs.
It’s not all good news, though.
Printing money (whether literally or figuratively) and buying up government bonds isn’t a truly sustainable economic response.
So, while Quantitative Easing may better position our economy in the short-term, it’s far from a long-term economic solution.
In fact, financial markets in both the United States and Japan have become reliant on them, making efforts to wind down spending much more difficult than first anticipated.
Plus, there’s always the fact that introducing significant sums of money into the economy carries risks of inflation in the future – but this isn’t like anytime soon, said Manning.
“The risk of an uptick in inflation is really low or nil at the moment,” he said. “Several economists are predicting zero percent inflation when the next Consumer Price Index figures are released.
“This is in stark contrast with economic conditions leading into the GFC — inflation and interest rates were both higher back then.”
A more concerning issue with Quantitative Easing is the way that growth in property and equity prices are highly beneficial to higher income earners, causing a discrepancy in overall economic benefits.
And even then, implementation of this technique across the world has demonstrated that Quantitative Easing is not the short-term saviour it’s made out to be.
Even with the downsides, the benefits provided by Quantitative Easing will be crucial for Australia in the following months.
But even then, while Quantitative Easing will help the overall economy through easier access to borrowing and investment, not everyone is going to be a winner.
Although the intention of this strategy is intended to drop the cost of borrowing in riskier corporate debt markets, Australia’s small corporate debt market is small, unlike those in overseas markets, so expectations should be adjusted accordingly.
In the meantime, business owners should look to solutions that are available right now, such as the implementation of a small business loan to help with COVID-19-related cash flow issues.
Even if you’re not considering a loan right now, discussing your options with your lender can help you develop a business plan for the long-term.
We’re living in an uncertain time, and although help is on the way, financial assurances are hard to come by. If you’re unsure what to do next, preparing your small business for a recession is a meaningful way to set yourself up to face the challenge ahead.
MYOB recommends any business facing hardship to seek immediate advice from an accredited accountant or other relevant advisor. To begin looking for specialist advisors near you, click through to the MYOB Partner Search page.