Global Economic Issues

Businesses

While many consumers responded with relative indifference to the global financial crisis, Australian businesses were far more aware of what was happening.  Most people were able to maintain their employment, protect the majority of their income, and enjoy approximately the same standard of living as they had prior to the crisis.  The same can not be said for business owners.

The available statistics suggest that the economic change in this sector was dramatic.  We have already seen that business confidence fell from a peak of 10.9 in June 2007 (according to the National Australia Bank Index of Business Confidence) to a low of -30.5 in December 2008.  This fall was mirrored by a fall in spending by this sector.  For example, in the quarter that ended on September the 30^th 2008, spending by the business sector was robust.  Almost $6 billion was spent on non-residential building commencements in that three month period, and a further $11.61 billion was spent beginning large scale engineering projects.  Both of these figures represented the highest ever recorded for a three month period.  Unfortunately, this was also the month in which Lehman Brothers declared bankruptcy.  By March 2009 non-residential building commencements fell to only $3.5 billion (a 41.6% decline), and the business sector spent just $8.142 billion starting new engineering projects (a 29.9% fall).  Not only does this contribute to lower levels of aggregate demand during the period, it will also mean reduced productive capacity in the future.

These raw statistics don’t really give us the full picture about how the business sector acted in Australia during this period.  To gain a greater understanding, you should take a moment to consider the corporate sector in the USA.  Some of America’s biggest financial companies; including Lehman Brothers and Bernard Madoff Investments collapsed during this period.  Other companies, like General Motors Holden and Chrysler were only able to keep operating after substantial government intervention.  A similar situation faced the business sector in the United Kingdom.  Many of these companies had links to Australian firms, and this was part of the reason that the fear of collapse was so widespread in this country.

As it happens, many small firms did end up closing their doors.  One larger firm that attracted a lot of media attention was the Storm Financial Group.  This company operated by encouraging customers to use margin loans to invest in the sharemarket.  As the value of the market fell, many people ended up losing their investments...and in some cases their homes.  In March 2009 the company was declared insolvent, and filed for bankruptcy with $80 million in debts.  The end result was that many people lost their life savings.

This also highlights another important consequence for this business sector; as a result of this crisis, the general public began to take far more interest in the amount of money that was being paid to business executives.  For example, a report by the Productivity Commission found that during 2008/09 executives in the top twenty companies in Australia received an average of $7.2 million in wages.  This is around 110 times the wage of the average person.  Executives in the next top twenty received close to $4.7 million.  As many employees lost their jobs, they became appalled at the fact that the people who had “caused” the crisis (in their eyes) were still earning such high incomes.  (As it happens for some executives their pay in 2008/09 was lower than it had been in 2006/07.  This is because senior executive pay-packets are often linked to the performance of the company, and as company profits were down during the crisis, the executives were forced to take a cut.)

As the crisis passed, the pressure on executive pay levels also eased.  Initially the Rudd government had asked for the Productivity Commission to examine executive pay in the hope that they would find some way of putting a reasonable ceiling on the amount that could be earned in a year.  This suggestion quietly passed, as did the suggestion that the entire board of a company should be up for re-election if 25% of the shareholders vote against the executive remuneration package.

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