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Treasury secretary John Fraser warns debt surge a 'major risk'
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/i/9/m/f/g/image.related.afrArticleLead.620x350.gkeaig.png/1445412045910.jpg[/img]Lamenting a $25 trillion surge in global debt since 2007, John Fraser told a parliamentary estimates hearing on Wednesday that the build-up is a "major risk to the global outlook". Sean Davey
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by Jacob Greber
Treasury secretary John Fraser has warned businesses enjoying the tailwinds of a lower dollar to maintain focus on boosting productivity to provide enough competitive buffer should it re-appreciate.
Mr Fraser, who sits on the Reserve Bank of Australia board, at the centre of speculation about the likely timing of another official interest rate cut, refused to forecast the direction of the exchange rate.
However, he suggested that relying on a low currency – which traded at US72.72¢ on Wednesday – to spur growth and income was unlikely to be a sustainable strategy.
"One day the exchange rate might go north, so you have to have businesses competitive" when it goes up, Mr Fraser told a Senate estimates hearing on Wednesday.
"If you look to the exchange rate as the saviour, over the longer term, you'll be disappointed."
One leading wealth manager at UBS this week warned there could be a sharprebound in the Australian dollar towards US80¢ as global interest rates remain stuck at record-low levels.
He urged businesses to take advantage of the lower exchange rate to become more productive, open up new markets and "be mindful that it might not always be there to support us at these levels".
BLEAK OUTLOOK
The remarks came after the Treasury secretary issued a bleak outlook for the domestic and global economy, and warned that $57 trillion of world-wide debt is a reminder of the urgent need to fix Australia's entrenched budget deficit.
Lamenting a $25 trillion surge in global debt since 2007, Mr Fraser told the hearing that the build-up is a "major risk to the global outlook".
He said Australia's weak wages growth and fluctuations on commodity prices would weigh on the budget, making repair of the fiscal position an "immediate priority".
"We need to address Australia's structural budget problem through greater expenditure restraint," he said.
Treasury's main focus, he said, was ensuring that the economy continues to expand, and he highlighted the significance of the recent Harper competition review.
"We all want growing real per capita incomes. And they come about through growing productivity."
'THERE'S BEEN PROGRESS'
Mr Fraser also lauded the recent increase in focus on economic, financial and tax reform.
Citing Tuesday's release of the government's response to the financial system inquiry, Mr Fraser said: "It's good there's been progress.
"I'm delighted, as I think most people are, that Harper is very much back on the table," he told the committee, when asked whether he was happy with the pace of reform.
"I think the tax reform discussion, whatever you want to call it, has been moving in a very intelligent direction, with all parties airing options."
On superannuation, Mr Fraser said that 16 years after its introduction, there were many parts of the system that are worth revisiting, given a number of "issues, which, on the face of it, may look a little strange.
"The prime minister has indicated, the Treasurer has indicated, that many things are back on the table.
"There were a lot of unintended consequences and things we didn't think of back in the 1990s," Mr Fraser said.
He made the remarks after being asked about reports that there are 475 superannuation accounts, with balances of more than $10 million and receiving $1.5 million in annual tax-free income.
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Economic outlook notably better: NAB business survey
Michael Roddan
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Reporter
[b]Business conditions in the non-mining sectors of economy are continuing to improve and the outlook is looking “notably better”, according to National Australia Bank’s quarterly business survey, which recorded the best conditions in seven years.[/b]
NAB said lower interest rates and the depreciation in the Australian dollar appeared to be having the desired effects on the economy, as surveyed business conditions rose to 11 points in the three months through September.
The reading for business conditions, which measures the trading, profitability and employment environment, reached its highest level since early 2008.
NAB chief economist Alan Oster said the result was in line with growing evidence that non-mining sectors of the economy were staging a more pronounced recovery.
Firms indicated some challenges when it came to currency movements, although this largely reflected negative impacts on the wholesale, retail and transport sectors, he said.
Companies in these industries tend to have a heavy reliance on imports, which the lower Australian dollar makes more expensive.
In contrast, areas such as personal services and mining are reporting a much more positive impact
Confidence levels, which fell four points over the three-month period, were a “little disappointing”, Mr Oster said.
“The fall in confidence is likely a reflection of the timing of the survey, which took place just prior to the change in Liberal leadership and at a time when recent concerns over emerging markets were at their peak,” he said.
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Malcolm Turnbull to turn reform talk into action: Richard Goyder
Eli Greenblat
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Senior Business Reporter
Melbourne
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Wesfarmers CEO Richard Goyder says Malcolm Turnbull was “pretty clear” on his agenda.Source: News Corp Australia
[b]Wesfarmers chief executive Richard Goyder believes Malcolm Turnbull will deliver on crucial economic reform, such as productivity and tax reform, rather than just talking about the vexing issues.[/b]
His belief follows a private conversation between the two at last month’s AFL Grand Final, when the new prime minister vowed talk would be converted into action.
Mr Goyder, who is one of the nation’s most powerful CEOs and boss of one of Australia’s biggest private sector employers, said he believed after chatting to Mr Turnbull that meaningful reform was on the government’s agenda.
“I have a degree of confidence this is very much on the agenda of the government and I hope that’s the case, and I think business will respond fairly positively if that is the case,’’ Mr Goyder told The Australian.
“I would be hopeful that we will get reform, and not just advocacy of reform, but reform implemented whether that’s tax, around productivity issues, retirement savings, there is a whole bunch of areas.’’
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Mr Goyder said he believed Mr Turnbull was sincere in his desire to get economic reform moving from beyond just talk.
“Talk has got to convert into actions,’’ Mr Goyder told The Australian. “But I would be pretty confident that is very much the PM’s thinking. I had the opportunity, I spent a bit of time with him, at Grand Final day in Melbourne at a function and he was pretty clear that that’s his agenda.
’’I don’t want to overstate it but I felt it was a pretty strong message.’’
He said there had been an uptick in confidence in the wake of the leadership change in Canberra.
“There is probably a bit of a more optimistic tone around the place at the moment — now whether that continues time will tell.’’
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Optimism back in boardrooms: NAB
Glenda Korporaal
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Senior Journalist
Sydney
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NAB group executive Angela Mentis Picture: Renee Nowytarger Source: News Corp Australia
[b]Australian business was feeling more optimistic on the back of the lower dollar, the signing of the free-trade deal with China and a new mood in Canberra, Angela Mentis, National Australia Bank’s group executive, business banking, said yesterday.[/b]
“Business is heartened about what the new government is talking about, they are heartened that there is a real vision for a prosperous, competitive and innovative economy,” Ms Mentis said in an interview with The Australian. Ms Mentis was speaking after the release of the latest NAB quarterly business survey, which shows business conditions in Australia improved strongly in September to their highest level since before the global financial crisis.
The business conditions index rose to 11 points, from five in the previous quarter — the highest level since early 2008.
The survey showed that there was growing evidence of a turnaround in the non-mining industry with trading and profitability in the non-mining sector both reaching their highest levels since early 2008.
“Businesses are not only saying that business conditions are better, they expect them to be better in six to 12 months time which is quite a change,” she said. “The lower dollar is having the desired effect with a noticeably positive impact on personal services such as tourism, health and education.
“We are still seeing caution with regard to the global economy but the domestic economy is doing better.”
Ms Mentis said concern about lack of policy action in Canberra had been something that had been affecting business confidence but this mood was now changing.
“It was being used as an excuse which was holding business back but now I am hearing a lot more positive momentum and a feeling that there is renewed political focus on a more prosperous and productive economy, ” she said.
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NSW retains title as top economic performer
Mitchell Bingemann
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Reporter
Sydney
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NSW has held on to its top spot as the nation’s best-performing economy. Source: ThinkStock
[b]NSW has held on to its top spot as the nation’s best-performing economy as its output was buoyed by population growth, retail trade and housing construction.[/b]
The top ranking was confirmed by CommSec’s quarterly State of the States report, which analyses eight economic indicators — including growth; retail spending; equipment investment; unemployment; construction work done; population growth; housing finance and dwelling commencements — to determine the nation’s top state and territory economies.
NSW topped four indicators: retail trade, population growth, housing finance and housing construction. It also came in second place on unemployment and was second strongest on equipment investment.
“NSW has solid momentum. Population is above long-term averages and that is driving home purchase and construction and retail spending.
“As a result, jobs are being created, keeping the jobless rate stable,” the report said.
Victoria consolidated second spot as population growth, housing finance and dwelling starts helped boost its performance.
The Northern Territory was third, but it fell further behind Victoria as it came in last on population growth, housing finance and dwelling starts.
But where the Territory lagged on population growth, it remained a strong performer on the jobs front where it had the lowest trend unemployment rate at 4.9 per cent.
The Territory tied third overall with Western Australia on the table but the report noted the two economies were showing signs of slowdowns as the mining industry continued its wane.
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Sydney Airport rides the Chinese tourism wave
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/k/8/s/g/3/image.related.afrArticleLead.620x350.gkge4m.png/1445765445508.jpg[/img]Sydney Airport is riding the wave of tourism from China. Louie Douvis
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by Jamie Freed
Back in September 1984, Air China operated the first commercial flight between mainland China (Beijing) and Sydney Airport.
Fast-forward 31 years and now there are 44 flights a week between China and Sydney, with that figure expected to rise by more than 50 per cent in the coming peak summer season.
As growth in the Australian economy shifts away from resources and into the services sector, the nation is becoming the beneficiary of a new boom in inbound tourism, particularly from China. And for investors looking to capitalise on the opportunities, Sydney Airport is one of the more obvious listed exposures.
The airport operator last week impressed the market with robust September traffic statistics. International traffic, which drives around 75 per cent of its revenue, grew by 5.2 per cent, including a 13.5 per cent rise in Chinese passport holders. The impressive traffic growth rate, which is above the year to date average of 3.5 per cent, has raised market expectations that Sydney Airport could lift its full-year distribution beyond its already increased August guidance of 25.5¢ per stapled security.
China is now the biggest international market for Sydney Airport, having recently surpassed New Zealand. And after a new bilateral traffic deal was signed between the Australian and Chinese governments earlier this year, Sydney Airport is increasingly attracting new flights from cities beyond the traditional hubs of Shanghai, Beijing and Guangzhou. Sichuan Airlines flies between Sydney and Chongqing and Xiamen Airlines will launch services between Sydney and Xiamen and Fuzhou in December.
The Australia-China Free Trade Agreement is also expected to lead to increased travel between the two countries in the future.
China had once been a tiny outbound travel market. In 1999, when Australia was one of the first Western destinations granted the status of an approved destination for tour groups, just 92,600 Chinese visitors arrived in the country, compared with 707,400 Japanese. But in the 12 months to August, the number of Chinese visitors reached 951,300, compared with 321,300 Japanese.
NUMBERS SET TO GROW
As Geoff Raby, a former Australian ambassador to China, told the Australian Airports Association conference in Hobart this month, there is room for Chinese outbound travel numbers to grow much higher as the economy shifts from export-led growth to a consumption-led growth model.
"It is a very big shift in Chinese consumption patterns that are under way driven by rising per capita incomes," he said. "Much of the growth is in tourism, recreation and entertainment, including sport. You can just see and feel the huge growth in consumption of these activities."
Out of the population of 1.4 billion in China, 107 million took overseas trips last year. But more than 70 per cent of the trips were to Hong Kong, Macau and Taiwan, meaning only 30 per cent travelled abroad in a meaningful sense. That equates to a rate of just 2.3 per cent of the population, versus the 38 per cent of Australians that took an overseas trip last year, showing the huge potential for the market as it matures. The number of Chinese trips overseas is forecast to double to 200 million over the next five years.
Australia, however, needs to remain competitive against rival destinations including New Zealand, the United States, Canada and Europe, all of which are vying for the attention of Chinese travellers.
Recent visa changes have allowed a 10-year multiple-entry visa trial for Chinese travellers, but at $1000, the cost is very high. And for a single-trip visa, mainland Chinese travellers must pay $130, versus $20 for those with Hong Kong passports.
Citi analyst Anthony Moulder said the government should cut the visa fee because that would be more than offset by the economic boost from an increase in Chinese arrivals.
Chinese visitors are already the highest spenders of all nationalities when they reach Australia's shores, contributing $7 billion, which is forecast to nearly double to $13 billion by 2020. Beneficially for Sydney Airport, that includes at duty-free shops where Credit Suisse estimates the Chinese spend four times as much as other nationalities, at around $35 a person. Sydney Airport has put in place Chinese signage, Mandarin-speaking ambassadors, Asian food and beverage options, UnionPay acceptance at retailers and a presence on Chinese social media to help grow spending further.
But although Sydney Airport is the biggest gateway for Chinese travellers, it is not the only one attracting more direct flights from China. Increasingly, airlines are setting their sights on direct flights to other cities across Australia and New Zealand, including secondary ones such as the Gold Coast, Cairns and Christchurch.
TRAFFIC STILL IMPORTANT TO SYDNEY
That will cut into Sydney Airport's market share, although nearly half of all Australians of Chinese ancestry live in Sydney, making it a major inbound and outbound market for visiting friends and relatives. Even Chinese visitors who bypass Sydney on the way in or out might take domestic flights to the destination to ensure they visit iconic sites like the Opera House and Bondi Beach during their trip. Sydney Airport doesn't make as much revenue from domestic flights, but the traffic is still important.
And China, of course, is not the only tourism market around. Sydney Airport is benefiting from increased capacity to the US from Qantas and American Airlines due to start in December. In fact overall, UBS expects airline capacity to and from the airport will rise by 12 per cent in the first half of 2016.
Apart from international traffic growth, the other major issue on the minds of Sydney Airport investors is the looming decision on whether to exercise its first right of refusal over the development of a new airport at Badgerys Creek in western Sydney.
The government released a draft environmental impact statement for public consultation last week, and toward the end of this year or the beginning of next year it is expected to issue Sydney Airport with a notice of intention with a development plan. The airport operator will then have four to nine months to decide whether it wants to proceed.
Sydney Airport chief executive Kerrie Mather in August set out some principles for the investment to make sense, saying the rate of return needed to be higher than Kingsford-Smith due to the risks involved, as well as the airport operator being able to retain strong and stable cash flows and downside protections in contracts.
There is talk the government is willing to fund $1.5 billion of earthworks for the development, with the Daily Telegraph last week reporting former Treasurer Joe Hockey had proposed a levy of $5 per domestic passenger and $10 per international passenger could be used to fund that part of the project.
No doubt airlines and passengers would not be pleased by the development, but given Sydney Airport's monopoly status and the lack of alternatives for most travellers, such fees could be tacked onto airfares. Another option, likely preferred by Sydney Airport, would be for a smaller levy across the nation's airports, given Badgerys Creek is considered a nationally important infrastructure project.
BADGERYS CREEK EXPECTED TO COST $2B
The remaining construction of a single-runway airport, due to open in 2025 with projected passenger traffic of up to 10 million a year, could cost more than $2 billion. Sydney Airport is by far the most logical operator of the airport because it can run the two airports in the region as a system, subsidising Badgerys Creek from higher charges at Kingsford-Smith if needed. In addition, not taking up its right to develop Badgerys Creek would introduce an unwanted competitive threat into the region.
Another debate continues to rage over whether the airport should have a rail line in place upon opening or if that isn't needed until traffic grows to a certain level. Although Sydney Airport could benefit potentially from higher car parking fees if there is no rail link, it is in its interest to ensure as many passengers as possible use the facility at the start in order to achieve the best possible economic return on its capital investment.
There are expectations the curfew-free airport will start out primarily as a home for low-cost domestic and international carriers, but over time, as slots fill up at Kingsford-Smith, it could increasingly be home to flights from full-service airlines. Ultimately, there are plans for Badgerys Creek to add an extra runway, giving it the capacity for an eventual 82 million annual passengers, which is more than double the number that pass through Kingsford-Smith at present.
Hardly anyone questions the ultimate need for a second airport in Sydney, but there is a debate over whether 2025 is the right timing. Sydney Airport's management team and board are expected to make a shrewd assessment of the government proposal. The company's leadership is well regarded by the market for its success to dates in initiatives like growing the Chinese market and the share price last week reached record highs. That means investors have confidence Sydney Airport will make the right decision about Badgerys Creek.
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A drought could be the biggest risk to the economy
With El Nino a harbinger of severe drought, the economy, weakened by the commodities downtown, may suffer another body blow.
NaN of
[img=620x0]http://www.afr.com/content/dam/images/g/k/c/t/n/w/image.related.afrArticleLead.620x350.gkjfsj.png/1445939294037.jpg[/img]Globally, climate patterns are consistent with a strong El Nino, implying that Australia will be lucky to escape its effects without suffering extensive and persistent drought. Paul Jones
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by Tony Walker
Prime Minister Malcolm Turnbull and Treasurer Scott Morrison may not have got round to factoring the potential for serious drought into their economic calculations, but risks of a more severe dry are rising as rainfall levels across the country fall well short of expectations.
Extreme weather events driven by an El Nino in the Pacific and an emerging positive Indian Ocean Dipole (IOD) risks delivering a double whammy to a continent that is, in any case, bone dry across much of Queensland, south-west Victoria, and south-west Western Australia.
The term El Nino, the Spanish for "Christ Child", was spawned in Latin America in the 1600s to describe unstable weather patterns. The phenomenon is linked with climatic disturbances globally.
Prolonged and widespread drought presaged by an El Nino and an IOD would deliver an unwelcome shock to Australian growth at a time when the Australian economy generally is soft due to a sharp downturn in the commodities cycle.
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Goldman Sachs asked a pertinent question this month in a research note: Will drought be the straw that breaks the camel's back?
"We are increasingly concerned that our GDP growth forecast for 2016 of 2 per cent is understating the risk from an intensifying drought in key parts of Australia," Goldman Sachs says.
Goldman is at the gloomy end of forecasts among consensus estimates of Australia's economic growth.
The bank's researchers noted that in the past 35 years significant droughts tended to strip anywhere between 50-100 basis points from GDP growth. The agricultural sector contributes about 3 per cent to Australia's total GDP.
"Compositionally, the largest headwind to broader growth is typically via lower crop production (particularly wheat), and given that wheat stocks are currently at relatively low levels, any mitigating boost from exports as inventories are run-down appears unlikely," it concludes.
Turnbull and Morrison might need to become familiar with meteorological terminology if drought conditions continue to worsen under the threat of a strong El Nino reinforced by an emerging positive IOD.
What this means is that an El Nino weather pattern in the Pacific bringing drier, hotter conditions to the Australian continent generally combined with a positive dipole in the Indian ocean would risk a rerun of some of the worst droughts in the country's history
The dipole refers to two poles in the Indian ocean, east and west.
As the Australian Government Bureau of Meteorology explains, differences in sea-surface temperatures in the Indian Ocean between east and west have a direct impact on weather patterns.
A "positive event" would be characterised by warmer sea temperatures in the western Indian Ocean relative to the east, thus reversing the normal westerly trade winds that bring cloudiness and thus rain to southern Australia and the Top End.
Meteorologists put risk of a "positive" IOD at more than 50 per cent.
EXTENSIVE AND PERSISTENT DROUGHT
Neville Nicholls, professor emeritus at the School of Earth, Atmosphere and Environment at Monash University and a former Bureau of Meteorology forecaster, notes that rainfall over the past year in drought-affected regions has been in the lowest 5 per cent of historical 12-month rainfall.
Statistically, this represents a 1 in 20-year drought and is thus at the critical end of the drought spectrum.
Nicholls says it is too soon to proclaim a "national scale drought", but Australia has entered what he describes as a "strong El Nino event, probably the strongest since 1997-98."
He points out that globally, climate patterns are consistent with a strong El Nino, implying that Australia will be lucky to escape its effects without suffering extensive and persistent drought.
"Drought has led to crop failure and famine in the New Guinea highlands and exacerbated the haze problem of south-east Asia caused by fires on Sumatra and Kalimantan," Nicholls points out.
"Droughts are threatening to lead to famine in parts of Africa…And in south-east Australia bad bushfire seasons often occur following El Nino events related to dry, warm conditions in the winter leading up to the bushfire season.
Australia fire authorities have been warning for weeks about heightened risks of bushfires in a dry and combustible environment across parts of Australia.
Nicholls also raises the issue of global warming. "The situation is probably being made more difficult by the continuing global warming we have been seeing for decades," he says.
"This warning makes it more difficult for climate scientists to predict how the 2015 El Nino will evolve, and whether the warming will exacerbate or offset the impacts of the natural El Nino."
"Will the El Nino continue to operate as it did in cooler times before global warming? Or are we disrupting the natural phenomenon in some way?" he asks.
This is the multi-trillion dollar question that will be impossible to answer for decades to come, but even the fact that doubt exists as to whether global warming may contribute to intensifying drought should be cause for concern.
Michael Roderick, professor of Physical and Mathematical Sciences at the Australian National University, has pondered whether the terrible drought that has gripped California for the past several years might be replicated in Australia, but at this stage he does not see evidence of that happening – which is not to say it won't.
On the other hand, Roderick notes that severe droughts have invariably accompanied severe El Nino's.
"Every time eastern Australian has had a really bad drought it is usually connected to a big El Nino," he says. "But every time there is a bad El Nino it's not always connected to a really bad drought."
Australia's most severe droughts since record-keeping began, number three: these were the Federation drought of 1902 in which Australia's sheep population halved; the World War II drought of 1937-47; and the so-called millennium drought of 2003-2012.
Bureau of Meteorology records since the 1860s show that severe drought has occurred in Australia, on average, once every 18 years.
MILK PRODUCTION AFFECTED
El Nino fallout is already having an effect in milk-producing regions of Victoria. The Age reported at the weekend that dairy farmers have begun slaughtering their less productive cows "as an El Nino sweeps across Australia".
Many farmers are being obliged to start using their fodder reserves earlier than anticipated.
Goldman Sach's warnings about risks to Australian economic growth are backed up by a report of the privately-funded Climate Council, Feeding the Hungry Nation, which addresses the costs of persistent "spring drought".
The report estimates that if drought persists in south-eastern Australia it would have the effect of reducing national income by $7.4 billion annually, equivalent to lowering GDP by one per cent.
In its conclusion, Goldman has drawn some sobering comparisons with the Australian economy's ability to weather previous droughts. In 1994-95, 2002-03 and 2006-07, non-farm GDP averaged robust growth of 4.6 per cent, 4.0 per cent and 4.3 per cent respectively, compared with an average 0.7 per cent of GDP drag on the economic growth from the farm sector.
"In contrast, we currently estimate non-farm economic growth will average around 2.0 percent in 2015-16. That is, the starting point is economic growth is some 75 percentage points below potential economic growth compared to the three prior droughts."
Arguing that a fall-off in farm revenues will add to a further easing of monetary policy and thus downward pressure on interest rates, the Goldman report says: "In other words, the economic context in which drought appears is of key importance to the eventual policy responses."
Tony Walker is the AFR's International Editor
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Harvey Norman profit surges 28pc after best sales in years
DateOctober 27, 2015 - 6:50PM- 26 reading now
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Sue Mitchell
Senior Reporter
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Harvey Norman chairman Gerry Harvey says consumer confidence is stronger than it's been for seven years.
Veteran retailer Gerry Harvey has dismissed concerns about consumer sentiment, saying the strongest sales growth in Harvey Norman's stores for more than seven years is proof that shoppers are confident and willing to spend.
In a move that augers well for the retail sector this year, same-store sales in Harvey Norman's Australian stores jumped 7.1 per cent in the September quarter – the strongest growth since the global financial crisis – lifting pre-tax earnings by 27.8 per cent to $91.8 million.
Gerry Harvey Wrote:Consumer confidence at the moment is not subdued, it's the highest it's been for seven or eight years
"Consumer confidence at the moment is not subdued, it's the highest it's been for seven or eight years – that's evidenced by the sales in our stores," Mr Harvey told Fairfax Media on Tuesday.
"We're the hottest retailer in the market at the moment."
Mr Harvey said surveys suggesting that consumers were cautious and that the initial optimism triggered by Malcolm Turnbull's election as Prime Minister last month had faded were not reflected in Harvey Norman, Australia's largest furniture and homewares retailer.
The ANZ-Roy Morgan Consumer Confidence index, released on Tuesday, rose just 0.1 per cent to 113.4 this week, following a 2 per cent fall the previous week.
"Whatever the surveys show that's not evidenced by the sales in our stores," Mr Harvey said.
"Customers are obviously spending their money and they're also looking at buying quality products, as evidenced by the fact that our average selling prices are going up rather than going down - they're looking at buying things that will last," he said.
Latest technology in demand
Consumers were spending between $2000 and $10,000 on the latest generation of flat-screen and curved-screen televisions and between $2000 and $4000 for extra heavy duty washing machines.
Same-store sales also rebounded in Harvey Norman's overseas operations, with Ireland sales rising almost 20 per cent (in $A terms), Northern Ireland sales by 44.1 per cent, New Zealand by 1.9 per cent and Slovenia and Croatia 9.4 per cent higher.
Sales were higher in all categories, including home furnishings, white goods and computers, lifting Harvey Norman's group sales for the quarter by 6.1 per cent to $1.5 billion.
Harvey Norman shares rose 3.1 per cent to $3.98, but are down on a 12-month high of $4.89 hit in June.
Harvey Norman is not the only retailer enjoying buoyant sales.
Budget furniture chain Fantastic Furniture told shareholders that same-store sales had risen 16.9 per cent in the first quarter of 2016, while sales at socks and sheets maker Pacific Brands rose 7 per cent in the first 16 weeks. Fantastic shares rose 2.2 per cent to $2.30 on Tuesday, down from a 12-month high of $2.39 hit in September.
Last week Super Retail Group, which owns Super Cheap Auto, Rebel and Ray's, said all three divisions posted positive same-store sales growth in the last two months after a mixed year last year.
Even womenswear retailer Noni B, the target of a $16 million takeover offer last year, is back in the black, for the first time in three years, with same-store sales and gross margins improving in the first few months of 2016. Noni B shares have doubled in the past year and closed at $1.00 on Tuesday.
However Woolworths is expected to report weak food and liquor sales and Big W sales when it releases September quarter figures on Thursday. Citigroup believes Woolworths' same store food and liquor sales fell 1.1 per cent in the quarter, after going backwards by 0.9 per cent in the June quarter. Big W same store sales are expected to fall 10 per cent after problems with a new stock management system.
Improved trend augers well
The improving sales trends auger well for a better year for discretionary retailers this year after a lacklustre 2015.
Analysts said retailers exposed to the housing sector were best positioned, even though mortgage rates had risen, house price growth had slowed and clearance rates had fallen sharply in recent weeks,
"People are forgetting about the benefits of renovation activity – even if house prices are flat, people might decide to stay and renovate," one analyst said.
Mr Harvey expects the growth in first quarter sales to continue, underpinned by strong consumer demand as well as internal measures such as new inventory management systems and store labour scheduling.
"The first quarter has always been indicative of the full year – I can't even think of a year when we did well in Q1 and crashed in the next nine months," he said.
"The analysts out there are talking about things like housing starts and how thats affecting our business - that's only a minor part of it," Mr Harvey said.
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Interest rates: Reserve Bank Melbourne Cup race-day cut odds-on
Adam Creighton
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Economics Correspondent
Sydney
Sid Maher
[Image: sid_maher.png]
National Affairs Editor
Canberra
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Inflationary tales. Source: TheAustralian
[b]A shock drop in inflation has raised the prospects of another record-breaking interest rate cut from the Reserve Bank as soon as Melbourne Cup Day, which could bring relief to mortgage-holders from the recent round of bank rate rises.[/b]
As financial markets factored in a 60 per cent chance of a rate cut next week, Malcolm Turnbull and Scott Morrison maintained pressure on the banks over a decision to raise interest rates due to tighter capital requirements imposed by the Financial System Inquiry.
The Prime Minister said the increase “is higher than is justified by the additional capital they are being required to hold’’.
“In the case of Westpac, for example, they put their mortgage up by 20 basis points so, you know, 0.2 of a per cent and that is about double what they would need,’’ Mr Turnbull said.
The Treasurer said he was never going to defend the banks raising rates: “They have to face up to their customers.’’
Continued pressure by the government would make it politically more difficult for the banks not to pass on any interest rate cut.
The prospect of a cut increased because, despite a near 20 per cent fall in the dollar over the past year, which should put upward pressure on imported consumer good prices, the rate of underlying inflation — which strips out volatile items — halved to just 0.3 per cent to September, the slowest pace in four years.
The annual inflation rate, which has now been below the RBA’s target range of 2 per cent to 3 per cent for the longest period since 1999, remained at 1.5 per cent, dragged down by a 10 per cent fall in the price of petrol.
“It will be hard for the RBA to argue against a cut when underlying inflation has fallen as much as it has,” said HSBC chief economist Paul Bloxham, who expects the Reserve to trim the official cash rate by 0.25 percentage points to 1.75 per cent next week, which would be a new record low.
The dollar dropped almost 1c to US71.1c upon release of the September CPI, as markets factored in a 60 per cent chance of a cut next week. Yields on government 10-year bonds fell to 2.6 per cent. Economists acknowledged the increased chance of a cut, but most still think the RBA will keep the cash rate unchanged at 2 per cent.
“While the extremely weak result should see the RBA mechanically trim its forecasts for inflation, we do not think it plans to revise its growth outlook, where surveys now report strong business conditions and suggest unemployment could actually edge lower,” said Barclay’s Kieran Davies.
The prospects of a November cut had already risen after the four big banks lifted mortgage interest rates between 0.15 and 0.2 percentage points because of the tougher prudential standards.
Governor Glenn Stevens had been playing down prospects for another cut, pointing to improving business conditions, strong employment growth and concerns about Sydney and Melbourne’s overheating property markets.
The biggest increases in prices over the quarter were fruit (up 8.2 per cent), cigarettes (2.1 per cent, owing to increased excise) and overseas holidays (4.6 per cent); increased competition at home drove domestic holiday prices down almost 1 per cent.
Additional reporting: Michael Bennet
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