Australia is going through an extraordinary and challenging time.
For most people, this will be a once in a lifetime event. The immediate impact sees dramatic changes to our daily lives. People are also anxious about their own and their family’s wellbeing as well as their jobs, investments and businesses.
Worst of all, people are dying and are unwell, making this an unusual shock to the global economy because unlike past disruptions caused by financial crises, this is a public health crisis.
This crisis is expected to have a large impact on our economy as it’s both a supply and demand shock. The closing of borders and restrictions on people movement has hit global economic activity along with consumer and business demand. This will see unemployment rise, impacting people’s incomes and putting businesses under stress.
The large-scale responses by governments, regulators and corporate Australia is exactly what we need.
Clearly, we are in unchartered territory.
However, we will get through this. And there are reasons not to lose hope.
Firstly, nations such as China, the initial epicentre of the virus, have had success in containment and are restarting their economies. Also, despite the horrific loss of thousands of lives globally, the mortality rate in many countries including Australia thankfully remains in the low single percentages, and reducing this loss of life and supporting those infected is rightly the immediate priority. Finally, Australia’s banking system has never been stronger and better placed to support the economy through a difficult and rare situation.
We all have a role to play in containing the spread of the virus and supporting the economy through this difficult period.
That includes governments via their welcome stimulus packages that will help support businesses and consumers struggling with an income hit. In addition, the RBA positively stepped up with a range of strong measures announced yesterday to provide liquidity to markets, and reduce the cost of borrowing by flattening the yield curve through purchases of government bonds – or “quantitative easing” – and cutting the overnight cash rate to a record low. The RBA’s new term funding facility providing low cost funding for banks will also boost the flow of credit, further assisted by the banking regulator APRA’s temporary relief on capital requirements.
While so-called QE and near-zero cash rates are undoubtedly extraordinary for Australia, these have been used extensively overseas since the GFC with some success and will help support the functioning of markets and, indeed, the overall financial system.
The response always had to be big and well targeted, and initiatives to date should be commended.
But banks also have a critical role to play – a fact we don’t take lightly at Westpac.
At their core, banks provide critical functions that support economic growth – allowing people to save and invest, lending to households and businesses (which in turn creates jobs) and facilitating the flow of money via payments systems and other services.
That purpose shaped our response to COVID-19.
Based on government advice, we moved to protect and support our more than 30,000 employees, who can in turn assist our customers whose incomes have been impacted. We’re also ensuring our critical infrastructure such as branches, ATMs and internet banking continue to operate and facilitating the ongoing functioning of the nation’s financial markets at a time of stress.
Yet as the industry’s response and ours at Westpac shows, we realise there is more we can do to help the economy get through this and come out the other side in the best shape possible.
Building on prior initiatives, we’ve today announced a tailored support package to help consumer and business customers affected by COVID-19. There are several elements, but a key plank is to provide six month repayment holidays for small businesses on term loans and deferral options for mortgage holders. While no one can magically boost demand in the economy amid heightened uncertainty and people movement restrictions, we can help to smooth out the hit to incomes and support jobs so people can continue to spend what they can and to ensure that when activity returns, businesses and consumers are as best placed as possible to take part in that bounce back.
And that rebound could be solid – our economists are forecasting GDP to contract in the first half of 2020 as consumer spending declines and industries such as tourism and education are impacted, before returning to growth in the second half.
While that growth profile indicates Australia will likely experience its first technical recession since the early 1990s in the first half of this year and it will be painful for many, it’s important to note that Australia’s banking system has never been stronger to ensure money continues to flow.
Since the global financial crisis, Westpac’s liquid assets have more than doubled to $144 billion, our CET1 capital ratio has risen from around 4.5 per cent to almost 11 per cent, or $46bn, and our funding mix has shifted to more deposits and less reliance on short-term debt markets. More broadly, as APRA pointed out yesterday, the entire Australian banking system’s capital levels – which ultimately support lending – have never been higher, reaching $235bn by the end of last year. Likewise, bad and doubtful debts have never been lower.
In short, we’ve spent the past decade or so building up our buffers so we can lend and help customers and the economy through a major shock. That time has arrived and Westpac is able – and willing – to play our part, having many experienced people who have been through challenging economic times before during our more than 200 year history.
Because if there’s one thing I know, the nation will get through this.
As the RBA Governor stated yesterday, Australia’s amazing fundamentals remain – abundant natural resources, strong institutions, a great education system, established rule of law and frameworks, relatively high population growth, bright and adaptable people. The list goes on and other opportunities will likely arise. For one, perhaps more supply chains and manufacturing returns to Australia after the virus highlighted the concentration and reliance companies globally have on China.
So, while we don’t know when nor how COVID-19 will be overcome, Australians have been through ups and downs before and shown their resilience and willingness to help get through to the other side.
For Westpac, these challenging times will be no different and we will remain open for business.