All Hands On Deck!

Rajiv Sondhi[1]

Even as we relish the defeat of the Covid 19 contagion, a new contagion is upon us.

As has been headlined in recent days, the economic contagion is rearing its head. And we will need the same bold, innovative and united moves from “the team of 5 million” to tame it quickly and effectively.

In recent days, local news headlines have not been encouraging. Large businesses seem to be competing with each other to announce layoffs. When the Prime Minister publicly expressed her anger, one opposition leader disingenuously suggested she “sticks to her knitting” and prompted some social media comments lamenting that we were moving to a ‘Nanny state’.

The message that got us through the first pandemic seems to be getting lost, even as the joblessness crisis starts to bite. Some 37.500 layoffs in May and it seems tens of thousands more will be coming in the coming months. Experts have predicted that we now face the largest threat to paid employment since the Great Depression of 1930.

To some degree, this development is understandable. Businesses that have been heavily reliant on overseas visitors, for instance, clearly have taken a major hit and face a serious sink-or-swim challenge. Some will need to shut down or re-invent their business model. Smaller businesses will suffer the most.

What is puzzling is that large businesses that have benefited from the generous government wage subsidy have promptly announced large redundancies, within days of the country moving to level 1 when the economic engine was meant to start up again.

Take the case of The Warehouse Group, which announced layoffs last week which prompted the PM to express her dismay. Last Sept 2019, the stock exchange has announced that the Warehouse Group lifted adjusted full-year profit by 25.6 per cent, and Net Profit After Tax attributable to shareholders up 185.8 per cent to $65.4m. Despite a quarterly revenue of $586 million and receiving $67 million in wage subsidies, the company announced layoffs of 1080 staff within a few days of level 1.

I don’t get this.

Of course it is not anyone’s intention for government to wade into the business turf and start dictating business decisions. That would be a Nanny state and that would not be desirable or viable at all. Staff costs bite, and they bite most when revenues are heading south.

But I do question the timing.

From a macro perspective, the more joblessness the economy creates in a hurry, the more buying power disappears in the system. As aggregate demand slumps, business revenues will also slump. And we can get the feel and smell of a recessionary downward spiral. No one gains in this scenario, not least relatively large and healthy businesses.

Just as the country gets its head up from a Covid lockdown and feels confident of the health outcome, rising joblessness can only push the head back down again. And we will then only prolong the agonising wait to return to healthy, prosperous times. For how long can the government step in with unemployment benefits and fiscal support?

Government cannot battle the economic contagion alone. Businesses that have the financial reserves from past prosperous years and who expect to remain viable in the medium to long term can arguably dig into those reserves now to help steady the ship. They can also explore other opportunities to reduce costs before dumping staff.

I know of a premium tourist resort in Bali that shut down completely earlier this year as a result of the Covid-19 lockdown. The business has been eminently profitable for some years. With overseas tourists completely drying up, survival was a serious challenge. The company owners have decided to adopt a counter-cyclical approach – not to lay off any staff, and survive for the short term by applying a sharp reduction in salaries for all company staff, including the Board and management. The message was, we are in this together, and we will get through this together.

This approach is not only more humane, it also makes economic sense.

Under normal circumstances, changes in business cycles require a cyclical business response. When the cycle goes down and revenues sink, it is customary and prudent for businesses to cut costs to survive or to remain profitable.

But these are not normal times. A different counter-cyclical approach is needed in current extra-ordinary times when we see the risk of a prolonged downward spiral. Keep employees on your rolls as long as you can afford to, or at least in the short and medium term, so that aggregate demand in the economy does not shrink and consumer (aka your staff) spending confidence stays buoyant.

That is exactly the counter cyclical approach government is adopting with its scaled up spending. If businesses do so too, we will have all hands on the deck, which will help keep our ship afloat.

[1] Rajiv is former staff of the World Bank and lives in Auckland

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