Will the economy fall off a cliff in September?

The worst of the COVID-19 pandemic may appear to finally be behind Australia but that hasn’t stopped concerns that the biggest economic impact could lie ahead.

The factor that is causing most concern is the arrival of September – a month in which an unprecedented amount of public and private sector stimulus measured in the hundreds of billions of dollars are due to come to an end.

The concern is that once the enormous amounts of stimulus are withdrawn, consumer spending could collapse and, in turn, toll the death knell for many businesses that have just managed to survive the crisis.

Regulators worried about stimulus withdrawal

Australian Prudential Regulation Authority chairman Wayne Byres is one who is concerned about the financial “cliff” in September, saying that banks would be allowed to reduce their capital buffers to act as a shock absorber for stresses in the economy.

Reserve Bank governor Dr Philip Lowe has also called on banks to use their buffers to support the economy through this once-in-a-century shock, saying the central bank did not expect capital ratios to be maintained.

Many analysts have warned that banks could face a sharp rise in bad debts around October this year when lenders start requiring customers to resume repayments and government support is withdrawn.

There has also been pressure put on the Federal Government to look at transitional arrangements when the JobKeeper and JobSeeker programs are due to wind down in September.

Banks providing a massive private stimulus

Banks have effectively been providing an unprecedented amount of private stimulus to the economy during the pandemic by allowing home and business borrowers to take six month loan holidays.

The most recent Australian Banking Association figures show that 429,900 mortgages had been deferred, totalling $153.5 billion.

Many households have also been seeking relief from rental payments and a variety of other bills including phone and electricity payments.

Almost 1.4 million people have also accessed up to $10,000 of their superannuation, with more than 463,000 of them were under the age of 30.

Figures show stimulus is working

Figures produced by AlphaBeta, a part of Accenture, and credit bureau illion, has shown how vital this combination of private and public sector stimulus has been in supporting demand across the economy.

However, AlphaBeta director, economist Andrew Charlton, said the economy was in danger of a “double whammy” if the hardship measures from the public and private sectors were suddenly withdrawn at the same time.

“These trends show that come September, we will be staring down the cliff face,” he said.

“Mortgages will need to be repaid. Those in hardship will further clamp down on discretionary spending, having a catalytic impact on the economy.”

The tracker showed that discretionary purchases by all home borrowers was 30% below normal in late April, but spending by borrowers who had received mortgage payment deferrals, and those who had not, recovered at a similar rate during the past month.

Spending creating winners and losers

Discretionary spending by both groups was now running about 7% below the pre-pandemic norm.

Discretionary spending includes all non-essential expenditure such as fashion, hair and beauty, entertainment and homewares.

While many businesses continue to struggle as the pandemic restrictions are lifted, the tracker showed that some businesses had been big winners, including food delivery, hardware and online electronics retailers.

Spending on food delivery was 230% higher than normal in the week of 11 to 17 May and has now been 200% above normal for three consecutive weeks while spending in home improvement is up to 40% above normal.

Other spending was much lower including for public transport, petrol and travel.