The Road Ahead for Australia is Painful and Only Just Starting

Dear Reader,

With a population of only 6,000, the small Spanish seaside town Benidorm faced extinction in the 1950s.

The town’s main activity was fishing, but the government was closing the Almadraba, the main fishing area, which meant many families would see their main source of income cut off.

On the other hand, a small number of tourists visited their beautiful beaches every year which generated some money for the town.

So with no alternative, the town set up an ambitious marketing campaign to ramp up tourism. They would sell their best asset — the sun — to turn the town into a European tourist destination.

In Germany, they placed signs all over the country letting Germans know how far (or actually how close) Benidorm is.

In Lapland Sweden, the town installed a ‘Benidorm consulate’. They even brought a family all the way to Benidorm from Sweden and paraded them around in their — probably very sweaty — traditional dress to be photographed.

They even promised to pay tourists if it rained during their stay.

It worked.

Tourists began vacationing in Benidorm, but the plan had unintended consequences.

As it turned out, foreigners were bringing in more than suntan lotion and wads of cash in their suitcases: bikinis. Bikinis were very much forbidden in catholic Spain during Francisco Franco’s rule.

But Benidorm wanted tourists, so they decreed people could use bikinis in town.

Benidorm got in trouble, as the Church threatened to excommunicate the town’s mayor.

It was then that he jumped onto his small Vespa scooter and drove the eight-hour trip to Madrid to talk to Franco about the advantages of legalising the bikini.

Benidorm’s mayor gave him the one argument that could change Franco’s conservative mind in impoverished post-war Spain: we need the money.

Needless to say, Benidorm is today a tourism success story…or an overcrowded ordeal, depending on how you like to vacation.

The town is known as the Mediterranean New York with the most skyscrapers per capita in the world.

Some would say Benidorm got lucky. The town was at the right place at the right time to exploit the tourism boom.

Others would say it was clever. The town had good resources and made the most out of them.

Discover five ASX-listed firms that have been beaten down during the crisis…with the potential to rally strongly as the market recovers. Click here to learn more.

It’s more than just luck

You could say the same about Australia.

You could call it the ‘lucky’ country.

To me, it has always had more to do with clever use of resources and strategic partnerships than luck.

As you are probably well aware, Australia hasn’t seen a recession since the 1990s. Australia dodged the 2009 crisis by taking advantage of the Chinese resource boom while the US and Europe suffered.

The long recession free streak has brought in some other risks though, like high asset prices and high household debt.

Now, will COVID-19 shatter that record?

While there is certainly more optimism out there with the easing of restrictions, it feels like we are in the eye of the storm, just waiting for the next hit.

I’ve argued before that with high asset prices and household debt, if unemployment were to rise, then we could be in some trouble.

On that, the jobs report came out this week.

In only one month, close to 600,000 people lost their jobs.

If it hadn’t been for JobKeeper, the numbers would have certainly been much worse. People in JobKeeper are still considered employed, even if they are working less hours.

Underemployment, or the people that want to work more hours but can’t, also shot up from 5% to 13.7%, or another 600,000 increase.

The participation rate (the number of people working or seeking work) fell to a low of 63.5%. Many have probably left the country.


The Rum Rebellion

Source: Trading Economics

[Click to open in a new window]

In total, 2.7 million people that were employed in March are now either not looking for work anymore or had their hours reduced.

Taking it all together, one in five are either unemployed or want to work more hours than what they have…and this is with JobKeeper in place.

Unemployment figures don’t usually tell the whole story

I’ve also argued before that the unemployment figures don’t usually tell the whole story.

They don’t pick up on people taking jobs for which they are overqualified or part time jobs on a temporary basis to pay the bills until they can find a job in their field. That is, marketers working in hospitality, engineers working as landscapers, you name it.

The Australian Bureau of Statistics also released the figures on visitors this week.

No surprise, they have fallen off a cliff. There was a 60% fall in March 2020 compared to the same month last year. The largest number from China, 78%.

When you look at the employment growth by industry for the last years, household services has been by far the biggest job creator, along with construction.


The Rum Rebellion

Source: RBA

[Click to open in a new window]

Household services include tourism-based businesses — such as accommodation and food services. There is also social assistance, recreation and home services.

With less students, backpackers and tourists coming into the country those sectors will certainly keep on taking a hit.

We are only starting to see the effects and this will have a huge effect on hospitality, property and construction sectors.

One of the areas starting to struggle is rental property. I’ve been keeping an eye on the market as it turns from a landlord market into a renter’s one. Prices are dropping, with landlords even offering several weeks of free rent.

Research from SQM this week showed that residential vacancy rates in CBD are increasing, fast. With Sydney jumping to 13.8% from 5.7% the month before and Melbourne to 7.6% from 5% the month before.

Some of these properties will surely end up crossing over into the ‘for sale’ side increasing downward property price pressure.

We’ve certainly acted quick and done a great job in controlling the virus so far. This could give Australia some advantages.

But the road ahead is painful…and it’s only starting.

There’s a lot of change coming. What’s worked before will not work now, and we will need ingenuity and to do things differently than in the past to get out of this one.

Best,


Signature
Selva Freigedo
Editor, The Rum Rebellion


Selva Freigedo is a research analyst for The Rum Rebellion. Born in Argentina, her passion for economic analysis started at a young age. Her father was an economist for the Argentinean governments and the family used to discuss politics and economics at the dinner table. Argentina is a country with an unusual economic history. Growing up there gave Selva first-hand experience on different economic phenomena such as hyperinflation, devaluation and debt default. Selva has also lived in Brazil, Spain and the USA. Back in 2000 she was living in the US as the dot com bubble popped… And in 2008 she was in Spain as the property market exploded and then collapsed… She has seen first-hand what happens when bubbles burst. Selva joined Port Phillip Publishing’s team in 2016, as an analyst. She now writes from her vantage point in Australia, where she settled in 2015.


Leave a Reply

Your email address will not be published. Required fields are marked *

The Rum Rebellion