Australian Economic News

[greengiraffe]

RBA makes pitch to revive economy
THE AUSTRALIAN FEBRUARY 04, 2015 12:00AM

Adam Creighton

Economics Correspondent
Sydney

THE Reserve Bank has joined the worldwide trend to ease monetary policy, cutting official interest rates for the first time in 18 months yesterday in a move that casts doubt on the health of the Australian economy and paves the way for official interest rates below 2 per cent by Christmas.

After holding rates at 2.5 per cent for 17 months in a row — the longest period of stability since the mid-1990s — the Reserve Bank Board, in its first and likely most controversial meeting of the year, cut the cash rate to 2.25 per cent, dragging the Australian dollar down to a new 6-year low of US76.5c.

RBA rates reaction

The prospect of cheaper money, which blindsided the 90 per cent of market economists who expected no change, sent local stocks soaring: the benchmark S&P/ASX200 jumped by 1.4 per cent and above 5700 for the first time since May 2008.

Westpac chief economist Bill Evans, the only major chief economist to pick the decision, said the Australian economy had been slowing more quickly than the RBA had anticipated and expected the RBA to cut again next month.

RBA governor, Glenn Stevens, totally rewriting his monthly monetary policy statement, pointed to souring global economic conditions especially in Europe and Japan, ongoing “sharp” falls in the price of Australia’s key exports, iron ore and coal, and “quite weak” domestic demand.

He said a further reduction in the cash rate was “appropriate”, as economic growth “will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little ­higher, than earlier expected”, and “with growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate”.

“The economy is likely to be operating with a degree of spare capacity for some time yet,” he said, adding that the Australian dollar remained “above most estimates of its fundamental value, particularly given significant declines in key commodity prices”, and “a lower exchange rate is likely to be needed to achieve balanced growth in the economy”.

The central bank gave no hint of further interest rate cuts, saying only that “this action is expected to add some further support to ­demand, so as to foster sustainable growth and inflation outcomes consistent with the target”.

But prices in financial markets suggested otherwise. According to Citi, investors are expecting a further cut either this or next month with near certainty, which would bring the cash rate to 2 per cent. The probability of two interest rate cuts by June was almost 70 per cent after 2.30pm yesterday.

“Economists hadn’t been taking enough notice of the correlation between central banks’ behaviour overseas,” said Andrew Lilley, an interest rate strategist at UBS, referring to the barrage of interest rate cuts by central banks over the past few months including Singapore, Canada, and India.

“The RBA is being drawn into a global easing largely whether it likes it or not because of upward pressure on the Australian dollar from quantitative easing in Europe and Japan,” he said, emphasising the European Central Bank’s decision to pump an extra €1.1 trillion ($1.6 trillion) into markets over the next two years.

Business welcomed the decision. “While the lower dollar will help stimulate local activity in time and lower prices for fuel are also favourable for domestic businesses and households, to date these have not been sufficient to counter the sources of weakness in the economy,” said Innes Willox, head of the Australian Industry Group.

Kate Carnell, the CEO of ACCI, said the decision recognised “that many consumers and businesses are doing it tough, with China’s slowdown hurting exports and policy uncertainty at home making planning difficult.” But economists said the surprise move had tarnished the RBA’s communications strategy — in its last monetary policy statement the RBA had foreshadowed a period of “interest rate stability”.

“What they said today they could have said anytime in the past six months,” said Saul Eslake, one of Australia’s top private sector bank economists, a little bemused that global factors hadn’t figured more prominently in the governor’s statement given the emphasis on such global factors by commentators advocating a cut over the past week.

“And what happened to the speech in July in Hobart about the importance of forward guidance?,” he said, referring to comments Mr Steven made emphasising the importance of updating language in official statements to guide market expectations.

Kieran Davies, chief economist at Barclay Capital, said after the rapid changes in market expectations of a rate cut last week the RBA had probably strongly foreshadowed the decision to a select group journalists, referring to the massive impact Herald Sun and The Weekend Australian columnist Terry McCrann had on financial markets last Thursday.

“The RBA obviously had a major change of view over the summer and they needed to prepare markets,” Mr Davies said.

Mr Evans said the most popular argument against cutting rates — the possibly of overstimulating the housing market — had been mitigated by the introduction of macro-prudential policies that aim to limit growth in banks’ investment home loans to 10 per cent a year.

“The strength in investor housing lending, particularly in NSW, will clearly be closely watched over coming months, but the bank will be hoping that the new soft measures announced in December will be enough to keep a lid on this market,” said Warren Hogan, ANZ’s chief economist.

[greengiraffe]

Investors extend bets on further interest rate cuts this year
DAVID ROGERS THE AUSTRALIAN FEBRUARY 04, 2015 12:00AM

WHILE yesterday’s interest rate cut from the Reserve Bank was broadly expected by money markets by the time of the board meeting, the tone of the accompanying statement was sufficiently dovish to see investors extend their bets of further interest rate cuts this year.

The Australian dollar dived 1.5 US cents to a five-and-a-half year low of US76.50c and looked capable of testing US75c after breaking technical support at US77c.

Three and 10-year commonwealth government bond yields finished down 16 basis points at 2.28 per cent and 1.80 per cent respectively, after each hitting fresh record lows. And the benchmark S&P/ASX 200 share index jumped 1.4 per cent to hit a 6½-year high of 5707.4.

Driving the surge were high-yield plays and beneficiaries of the lower exchange rate while the energy sector was led by a bounce in oil prices.

Despite a lack of formal guidance on the outlook for interest rates, the RBA expressed enough concern about the economy for the market to price in almost two more cuts by year end.

Overnight indexed swaps for December fell to 1.79 per cent from 1.94 per cent the day before.

The market was taking no chances ahead of Friday’s six-monthly Statement on Monetary Policy, where the RBA is expected to slash its economic growth and inflation forecasts.

In the most telling guide to the monetary policy outlook, the RBA said domestic demand growth was “overall quite weak”.

“The fall in energy prices can be expected to offer significant support to consumer spending, but at the same time the decline in the terms of trade is reducing income growth,” the RBA said. “Overall, the bank’s assessment is that output growth will probably remain a little below trend for somewhat longer, and the rate of unemployment peak a little higher, than earlier expected. The economy is likely to be operating with a degree of spare capacity for some time yet.”

The RBA said yesterday’s rate cut was expected to “add some further support to demand, so as to foster sustainable growth and inflation outcomes consistent with the target”.

But in light of the relatively grim economic assessment, one cut is unlikely to achieve that objective. The RBA went on to say that: “With growth in labour costs subdued, it appears likely that inflation will remain consistent with the target over the next one to two years, even with a lower exchange rate.” The message is that inflation will stay low enough to warrant further rate cuts if needed.

And the risk of a housing bubble is one the RBA is prepared to take, but it has set up macro-prudential tools to control that risk, such as a cap on investor lending. “The bank is working with other regulators to assess and contain economic risks that may arise from the housing market,” it said.

Adding to the message that further rate cuts are needed, it stuck to its view that the exchange rate “remains above most estimates of its fundamental value, particularly given the significant declines in key commodity prices”. A lower exchange rate was likely to be needed to achieve balanced economic growth, it added.

According to Westpac chief economist Bill Evans, who was the first economist to predict the cut this month, one more 25 basis point cut in March will be enough to get the economy back on track.

“We believe that the forecasts that will be released in the Statement on Monetary Policy will depict an economy expected to grow markedly below trend in 2015, barely back at trend by 2016 and with core inflation holding near the bottom of the 2-3 per cent band in 2015,” Mr Evans said. “Under those circumstances we think it is justifiable to expect another move with March being the best timing.”

[greengiraffe]

Retailers face spending slowdown after cheerless Christmas
THE AUSTRALIAN FEBRUARY 06, 2015 12:00AM

Eli Greenblat

Senior Business Reporter
Melbourne
Strip Shop Shopping Crowds
Boxing Day sales did little to lift the gloom for retailers. Picture: Steve Tanner Source: News Corp Australia

THERE was little cheer for retailers over the crucial Christmas trading period.

Australian Bureau of Statistics data for December showed national retail sales ­remained stubbornly below historic trends, with lower interest rates and cheaper petrol no promise of salvation.

The release of retail sales comes as a number of the nation’s biggest publicly listed retailers, ­including Woolworths, Wesfarmers and Harvey Norman, prepare to report half-year earnings over the next few weeks.

For many of these discretionary retailers, the frenetic Christmas and Boxing Day sales can generate up to a quarter of earnings for the year, and already four companies — Specialty Fashion, Oroton, The Reject Shop and Kathmandu — have issued profit downgrades after reflecting on their trading during the holiday season.

A growing concern in the new year, apart from customer apathy, is the weakening Australian dollar, which will drive up wholesale prices for retailers that import goods. They face an intensely competitive sector, making price rises at the check-out painful.

“The ultimatum is to lift prices or face margin squeeze,’’ said Morgans analyst Josephine Little.

“Effective pass-through of price increases while consumer confidence is so fragile will be a difficult proposition in our view.’’

The fragility was evident in ABS data released yesterday that showed retail trade rose by a soft 0.2 per cent in December. It was the seventh consecutive month that sales showed growth.

Long-term trends point to an entrenched slowdown in spending. Annual spending growth eased from 5 per cent to 4.1 per cent, below the decade-­average growth rate of 4.3 per cent.

There was better news for particular retail sectors. The strongest growth in the quarter was in electronic and gas goods retailing, up 10.6 per cent — the strongest result in 14 years. This was followed by footwear and other personal accessories, up 5.9 per cent (the strongest in two years), and liquor, up 2.6 per cent (the strongest in three years).

The biggest drop in sales in the quarter, according to the ABS, was recorded by newspapers and books, down 7.1 per cent, followed by cafe and restaurants, down 2.8 per cent — the weakest result in four years.

“What the result highlights is a momentum shift,’’ CommSec economist Savanth Sebastian said. “Activity levels were strong at the start of the quarter but seem to have pulled back over the Christmas spending period.’’

But this week’s cut to ­interest rates and potentially a fresh round of easing should ­bolster spending.

“Sticking to the good news, the recent rate cut and the likelihood of further interest rate cuts should support activity over the medium-term. The key shift in household psychology is that rate hikes are clearly off the agenda over the coming year — and that should support spending,’’ Mr Sebastian said.

[Boon]

2.75 % is still relatively good growth if it could be achieved - even if further rate cut is needed - still has 225 basis points to play with
________________________________________________________________________________________________________________
RBA revises 2015 growth forecasts, will watch housing 'carefully'

February 6, 2015 - 12:44PM

Jonathan Shapiro

The Reserve Bank has cut its median 2015 growth forecasts for the Australian economy to 2.75 per cent from 3 per cent, but is pinning its hopes on lower interest rates and a falling dollar to drive growth beyond 2015...............................

http://www.smh.com.au/business/the-econo...37qvd.html

[BlueKelah]

Unemployment in surprise jump to 6.4pc

Australia's unemployment rate surged to 6.4 per cent in January, making its surprise fall to 6.1 per cent in December short-lived.

The Australian Bureau of Statistics said on Thursday that the number of people employed fell by 12,200 to 11.668 million in January, against market expectations of a fall of 5,000.

This took the official unemployment rate to 6.4 per cent from 6.1 per cent in December, while the participation rate remained steady at 64.8 per cent of the population.

The figures were well below expectations, and the Australian dollar plunged more than half a US cent, to US76.63 cents.

The Reserve Bank of Australia highlighted its concerns about continuing softness in the jobs market last week, when it cut the cash rate for the first time in 18 months.

Thursday's result is likely to ramp up speculation about a second cut within months.

"While the market had expected some weakening in labour force conditions in January after the surprisingly good figures in December, the increase in the unemployment rate to 6.4 per cent was worse than feared," said ANZ's co-head of Australian economics Riki Polygenis.

"This is a new peak for the unemployment rate, with the previous peak at 6.3 per cent in October and November following revisions.

"For monetary policy, today's figures are more consistent with the RBA's revised forecasts for the unemployment rate to rise further and to stay elevated for an extended period," she said.

ANZ is forecasting a second rate cut in the first half of this year, "most likely at the next board meeting in March".

CommSec chief economist Craig James agreed.

"On the basis of the continued softness of the job market, there seems no barrier to the Reserve Bank cutting interest rates again at the March board meeting," he said.

"Simply, Australia is growing at a far slower rate than its potential."

The ABS said the drop in employment was driven by lower full-time employment for both males - down 26,000 - and females, down 2,100.

"The decrease in full-time employment was partly offset by an increase in male part-time employment, up 17,800," it said.

It said the seasonally adjusted number of people unemployed increased by 34,500 to 795,200 in January.

Unemployment rose in most Australia's states, with only Western Australia showing an improved jobs market. In South Australia, the unemployment rate soared from 6.6 per cent in December to 7.3 per cent in January.

[edragon]

For easy reference.

RBA Governor Stevens appearing before the Australian parliament's House of Representatives' Standing Committee on Economics

These comments from his opening prepared testimony:

Says economy growing at below trend pace <biggest customer is not buying as much>
Says inflation is low and appears likely to remain so
Further fall in AUD likely to occur <still sticking to the 0.75 mentioned before>
Says commodity prices have fallen quite sharply in some cases
Says monetary policy still has capacity to give additional support to economy <still? meaning not much to go>
Fall in key export commodities hurting Australia's terms of trade
Says mining downswing will accelerate this year
Bank's forecasts assume lower path for interest rates, but is not a commitment to action <say only>
Says domestic demand outside mining mixed
Public sector spending still fairly subdued
Says working with other regulators on managing potential risks from rise in housing investment <cooling measures such as those in HK & Singapore?>>
Developments in the Sydney housing market remain concerning; not alarming elsewhere <only Sydney?>
Monetary policy is still able to give extra demand support <meaning not much more>
Possible that monetary policy's "power to summon up additional growth in demand could, at these levels of interest rates, be less than it was in the past"
Unwise to react to one monthly jobs number
Says unemployment has been edging up, to keep happening for little while yet <still going up>
Says unemployment remains low by historical standards

[specuvestor]

It's not that different from what we discussed in 2H last year. What is different is the marked change in government's awareness that foreign money is becoming an issue in property market. Whether they were delusional at first or mere politics i will never know but i doubt RBA is stupid

^^ those advocating pumping non productive housing to offset productive activity decline are advocating jumping from the pan into the fire. Worse than kicking can down the road.

They have no idea... Just number crunchers. If policy makers listen to them will be disastrous

Sometimes it is not the government that is stupid

... we've seen so many boom and busts in the REGION. Why would this time be different for Australia with rising unemployment, declining commodity prices and economy boosted by housing FDI which is unsustainable?

http://www.valuebuddies.com/thread-5501-...#pid102351

[BlueKelah]

It's not that different from what we discussed in 2H last year. What is different is the marked change in government's awareness that foreign money is becoming an issue in property market. Whether they were delusional at first or mere politics i will never know but i doubt RBA is stupid

^^ those advocating pumping non productive housing to offset productive activity decline are advocating jumping from the pan into the fire. Worse than kicking can down the road.

They have no idea... Just number crunchers. If policy makers listen to them will be disastrous

Sometimes it is not the government that is stupid

... we've seen so many boom and busts in the REGION. Why would this time be different for Australia with rising unemployment, declining commodity prices and economy boosted by housing FDI which is unsustainable?

http://www.valuebuddies.com/thread-5501-...#pid102351

It's high level politics (C*rr*pti*n). Example is the Matthew guy ex-planning minister in melbourne who approve the development for the 555 collins street site.

[Mr Stamoulis bought the property for $38 million in 2003. Soon after Mr Guy changed the planning rules for the site, he sold it to Singaporean developer Fragrance Group for $78 million.]

Read more here

Sure that many of these big money deals are being done behind closed doors with chinese developers as well.

Aus gov is probably more concerned about the impact now as shown in Melbourne and Brisbane recent elections their hard won majority last election has been overturned. More locals are speaking out against foreign investment buying up local props and business.

[greengiraffe]

Rate cuts failing to bite: RBA
THE AUSTRALIAN MARCH 06, 2015 12:00AM

David Uren

Economics Editor
Canberra

INTEREST rate cuts are losing the ability to stimulate the economy, with the Reserve Bank warning that it is up to the government to take measures to help revitalise growth.

In a frank admission of the limits to the influence of central banks, Reserve Bank deputy governor Philip Lowe said consumers, businesses and governments were not responding to the extraord­inarily low interest rates that would once have sparked an inflationary debt boom.

Dr Lowe said rate cuts were having little effect on household consumption because retirees and other savers were being forced to cut back their spending and their income fell in line with rates, while people with debts were using lower rates to accelerate repayments rather than raising their spending.

In a speech in Sydney yesterday, Dr Lowe said monetary policy was becoming less effective worldwide. He said inflation rates were falling and investment and consumption growth remained depressed, despite years of exceptionally low interest rates — including the current record low of 2.25 per cent in Australia — and the extraordinary support provided by the major advanced nations­’ central banks buying their governments’ bonds.

“Economic activity does not appear to have responded to the stimulatory monetary conditions in the way that occurred in the past and inflation rates have been very low,” he said. “I find it difficult to escape the conclusion that changes in interest rates are not ­affecting decisions about spending and saving in the way they might once have done.”

The RBA opted this week to keep rates on hold at 2.25 per cent — less than half their level of 4.75 per cent in late 2011 — but many economists expect a 25-basis-point cut to a new record low of 2 per cent in coming months, with the economy remaining soft.

Dr Lowe said that one of the ways monetary policy worked was by encouraging people to bring forward spending, either by borrowing or drawing on their savings.

“In the years leading up to the (global financial) crisis, a reduction in interest rates could be reliably predicted to encourage such a response,” he said.

“Credit was easily accessible, economic volatility in many economies was low and people were prepared to borrow. In today’s world, things look quite different.”

An interest rate cut puts more money into the aggregate household budget because household borrowing is always much larger than household deposits in savings institutions. However, savers and borrowers respond in different ways. “Many borrowers have responded to the lower interest rates of recent years by paying off their loan a little faster, rather than increasing their spending,” he said.

Since the rate cuts that began with the global financial crisis, repayments on home loans have risen to exceed the scheduled repayments. “Conversely, it seems likely that those relying on interest income have reduced their spending by more than would previously have been the case,” Dr Lowe said. “Certainly, the many letters we have been receiving at the bank recent­ly would suggest this.”

Dr Lowe said the most important single reason for the loss of effectiv­eness in monetary policy around the world was the size of the debts that were built up ahead of the GFC. In the case of Australian households, there was a big rise in mortgage debts in the decade to the mid-2000s as people reac­ted to lower rates and increase­d availability of finance.

“In (this) earlier period, the level of interest rates that we have today would have caused a large boom in borrowing, but this has not occurred,” Dr Lowe said.

The surge in house prices in the early 2000s led households to withdraw equity from their homes, increasing their mortgages, and using the proceeds to fatten the household budget. Despite the recent lift in house prices, households are continuing to inject additional equity into their homes.

Dr Lowe said the same reaction to low interest rates could be seen in governments. “Few governments have seen the very low intere­st rates as an opportunity to support long-term infrastructure investment at low cost,” he said.

“Rather, much as households have done, governments have taken advantage of the lower debt-servicing costs to help shore up their finances.”

Dr Lowe said that although monetary policy was less effective than it once was, it was still helping to support the Australian economy. He said the lift in housing construction was exactly what had been expected by the Reserve Bank when it cut rates in the second half of 2013.

This was boosting employment in the construction industry and bringing added benefits through spending on homewares and relate­d goods.

Lower interest rates have also contributed to the fall in the Australian dollar — from more than $US1 in mid-2013 to about US78c now — making industries exposed to international trade more competitive. An early sign of this was a lift in exports by services sectors such as education and tourism. “I don’t think we’re at the point of concluding that monetary policy is not effective in boosting the economy,” Dr Lowe said.

“We’re some way from that and we do have the scope to lower intere­st rates further if we deem that that’s appropriate.”

Dr Lowe said that, stepping back from the short-term problems, the broader issue for the globa­l economy was that there was a greater appetite for saving than for investment.

“The solution to the problems caused by the disconnect between the desire to save and the desire to invest cannot lie with monetary policy,” he said.

“Instead, it lies in measures to improve the investment environment so that once again there is strong productive demand for the use of our societies’ savings.”

[greengiraffe]

Peckish Asians have taste for Aussie brands
Sue Mitchell and Lisa Murray
770 words
21 Mar 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.

Food manufacturing Australian companies are hot property.

Sam Schachna's father Ely would be proud. When the Schachna family's company, Menora Foods, created a range of chunky dips under the Wattle Valley brand almost 11 years ago, no one knew for sure whether the unusual combination of nuts, cheese and herbs would appeal to Australian consumers.

"We were the first company to combine cashews and parmesan - now it's the No.1 dip in Australia," says Schachna, 34, who took the reins from his 70-year-old father two years ago.

Now Wattle Valley dips, along with Menora's other leading brands such as Wattle Valley wraps and Peckish rice crackers, are heading to supermarkets in Asia. Menora Foods has been gobbled up by one of the Philippines' largest food companies, Monde Nissin, which paid an estimated $55 million for the company earlier this month, seven months after Mr Schachna launched a strategic review.

It was Monde Nissin's third acquisition in Australia in less than a year. In January it paid about $80 million for juice maker Nudie and in June it paid a reported $115 million for another family-owned company, dip-maker Black Swan, in its first foray into the Australian food-manufacturing sector.

Less than a week after the Menora deal, Singapore-based oils company Wilmar International and Hong Kong-based investment company First Pacific, which owns half of Indonesian noodle and snackfood maker Indofood, completed their $1.3 billion acquisition of Australia's largest listed food manufacturer, Goodman Fielder.

Monde Nissin, Wilmar and First Pacific plan to take advantage of their extensive distribution networks in China, the Philippines and south-east Asia to sell Menora, Black Swan and Goodman Fielder brands, which include Meadow Lea margarine, Praise mayonnaise, White Wings cake mixes and Meadow Fresh milk, to affluent Asian consumers. Food industry sources say more multimillion-dollar deals are likely as cashed-up Asian food companies, many of which already dominate their existing categories and have exhausted growth options at home, search for new opportunities.

Asia's fast-growing middle and upper classes are in their sights.

"There's an emerging middle class in Asia, which has a strong affiliation with Australia and which is looking for the same things we're looking for here and they just can't find it in their supermarkets," Monde Nissin's Australia chief executive Chris O'Sullivan says. "Premium brands in Asia can sell for double the price they sell for in Australia."

At the upmarket IAPM mall in Shanghai's French Concession, for example, Bellamy's Organic infant formula is locked up with other imported milk powder tins and is fetching 398 yuan ($84). Other Australian food products such as Pure Harvest Oats, Jelly Belly lollies and John West fish fingers are dotted around the supermarket.

However, at three mainstream Chinese supermarkets nearby - Lianhua, NGS and Dia Market - there are virtually no Australian products, apart from a few bottles of Australian wine.

Monde Nissin, which has more than one million distribution points in 40 countries, is evaluating which of the Menora, Black Swan and Nudie products will be exported to Asia in their current forms and which will be tweaked to suit Asian tastes. "The key thing from Monde Nissin's perspective is the premium-ness of the product, so they're keen for them to be manufactured in Australia," O'Sullivan says. "It adds to the premium-ness of the brand - anything made locally tends to be diminished in value."

This is music to the ears of Australian Food and Grocery Council chief executive Gary Dawson, who says foreign investment is critical to the future of the $112 billion food and grocery manufacturing sector.

"The interest in export opportunities in Asia is across the board, from Australian companies as well as foreign-owned companies, but navigating their way through things like regulatory requirements and distribution arrangements within China, for example, is not easy," Dawson says. "That's where a linkage with an established player within China can be advantageous."

Goodman Fielder's new chairman, First Pacific executive director Robin Nicholson, says the trans-Tasman food company already has a thriving export business. "This is an opportunity to ramp it up," he says. "If we can see an opportunity to take successful, well-established Australian and New Zealand brands and push them into Asia we're going to seize that. It's impossible to find two stronger partners. You should not underestimate the power of the consortium's reach in Asia."


Fairfax Media Management Pty Limited

Document AFNR000020150320eb3l0001d