Australian Economic News

[BlueKelah]

Australia's Growth Risk: Fewer People Want to Live There

As Australia’s mining-investment boom winds down, the central bank has been relying on a steady flow of new migrants to boost the economy -- a stimulant most developed nations lack.

But the country’s appeal is now waning as wages stagnate and its jobless rate climbs above the U.S. level. The population is on track for the slowest growth in nine years -- a danger signal for an already faltering economy.

“It’s another challenge for policy makers already struggling with a difficult situation,” said James McIntyre, head of economic research at Macquarie Group Ltd. in Sydney and a former Treasury official. “On the monetary policy side, it really amps up the pressure.”

An expanding population and record-low interest rates are lynchpins for the Reserve Bank of Australia’s forecast that growth will pick up to its long-run average of about 3 percent. Without rising ranks of new workers to boost consumption and buy the growing number of newly constructed houses, the economy’s recovery is that much trickier.

Australia’s population growth slowed to 1.4 percent in 2014 -- double the average of countries in the Organisation for Economic Cooperation and Development but down from 1.8 percent two years earlier. The slowdown is at odds with the RBA’s May forecast for a 1.7 percent gain in working-age population this year.

Easing Needed?

“This suggests the Australian economy will likely fall short of the current growth path expected by policy makers in the near term and thus justifies some further easing,” said Tim Toohey, chief economist for Goldman Sachs Group Inc. in Australia.

Consumer confidence dropped 3.2 percent this month, a Westpac Banking Corp. survey showed Wednesday, as pessimists outnumbered optimists for the 15th time in 17 months.

Australia and the U.S., which traditionally vie for immigrants, are heading in opposite directions economically. The jobless rate Down Under, currently at 6 percent, has been higher than the U.S. rate, now at 5.3 percent, for the past nine months.

“Would you move to a country where you can’t get a job?,” Toohey said.

Macquarie estimates Australia’s population growth could slow to 1.3 percent this year, the weakest since mid-2006, as net migration cools to 162,000. Treasury projected earlier this year that a net 237,750 people would arrive in 2015, rising to 250,000 in each of the following three years.
Consumers Critical

The danger of the slowdown in new arrivals is underscored by Australia’s first quarter growth data. The economy expanded 2.3 percent from a year earlier, with 1.3 percentage points of that coming from resource exports, according to McIntyre. That means the rest of the economy produced just 1 percentage point of growth, highlighting the importance of sustaining consumer demand.

Alongside fewer migrants, the natural increase in population also slowed last year to the weakest since 2006.

“Households are choosing to have children only after a period of sustained income growth,” Toohey said. Given household income growth is the slowest since the early 1990s, “it is not surprising that the number of births has slowed appreciably.”

Fewer workers than expected are also a complication for Australia’s budget, as revenue from personal income and consumption taxes is hit. The fiscal deficit is already more than 2 percent of gross domestic product and compounded by falling iron ore prices.

Treasurer Joe Hockey said Wednesday that tax rates should not be set at levels that drive talented foreigners away.

“Lower taxes provide a great conduit for new investment and entrepreneurship,” he said. “Talent will always gravitate towards wherever the reward is greatest.”

Housing Glut?

Then there’s housing.

The central bank’s 2 percent cash rate has fueled a surge in property prices in the two biggest cities, Sydney and Melbourne, prompting a building boom as construction companies cash in. Policy makers have hailed the home building boost as a means to ease supply shortfalls and soak up former mine workers.

But Goldman now sees the potential for a property glut as population growth slows. Its revised demographic estimates point to an excess of 75,000 dwellings by 2017 rather than a previously forecast shortfall of 140,000.

The slowdown in population growth is a headache for RBA Governor Glenn Stevens.

“It represents a weakening of one of the key fundamentals the RBA has highlighted as supporting a pickup in non-mining investment,” McIntyre said.

[greengiraffe]

The people who don't need onshore income is making a beeline for this beautiful country.

If I have an opportunity, I would like to live Down Under and I m pretty sure that many Asians including Singaporeans, Malaysian, Indonesians would like to.

No Vested Interests

Australia's Growth Risk: Fewer People Want to Live There

As Australia’s mining-investment boom winds down, the central bank has been relying on a steady flow of new migrants to boost the economy -- a stimulant most developed nations lack.

But the country’s appeal is now waning as wages stagnate and its jobless rate climbs above the U.S. level. The population is on track for the slowest growth in nine years -- a danger signal for an already faltering economy.

“It’s another challenge for policy makers already struggling with a difficult situation,” said James McIntyre, head of economic research at Macquarie Group Ltd. in Sydney and a former Treasury official. “On the monetary policy side, it really amps up the pressure.”

An expanding population and record-low interest rates are lynchpins for the Reserve Bank of Australia’s forecast that growth will pick up to its long-run average of about 3 percent. Without rising ranks of new workers to boost consumption and buy the growing number of newly constructed houses, the economy’s recovery is that much trickier.

Australia’s population growth slowed to 1.4 percent in 2014 -- double the average of countries in the Organisation for Economic Cooperation and Development but down from 1.8 percent two years earlier. The slowdown is at odds with the RBA’s May forecast for a 1.7 percent gain in working-age population this year.

Easing Needed?

“This suggests the Australian economy will likely fall short of the current growth path expected by policy makers in the near term and thus justifies some further easing,” said Tim Toohey, chief economist for Goldman Sachs Group Inc. in Australia.

Consumer confidence dropped 3.2 percent this month, a Westpac Banking Corp. survey showed Wednesday, as pessimists outnumbered optimists for the 15th time in 17 months.

Australia and the U.S., which traditionally vie for immigrants, are heading in opposite directions economically. The jobless rate Down Under, currently at 6 percent, has been higher than the U.S. rate, now at 5.3 percent, for the past nine months.

“Would you move to a country where you can’t get a job?,” Toohey said.

Macquarie estimates Australia’s population growth could slow to 1.3 percent this year, the weakest since mid-2006, as net migration cools to 162,000. Treasury projected earlier this year that a net 237,750 people would arrive in 2015, rising to 250,000 in each of the following three years.
Consumers Critical

The danger of the slowdown in new arrivals is underscored by Australia’s first quarter growth data. The economy expanded 2.3 percent from a year earlier, with 1.3 percentage points of that coming from resource exports, according to McIntyre. That means the rest of the economy produced just 1 percentage point of growth, highlighting the importance of sustaining consumer demand.

Alongside fewer migrants, the natural increase in population also slowed last year to the weakest since 2006.

“Households are choosing to have children only after a period of sustained income growth,” Toohey said. Given household income growth is the slowest since the early 1990s, “it is not surprising that the number of births has slowed appreciably.”

Fewer workers than expected are also a complication for Australia’s budget, as revenue from personal income and consumption taxes is hit. The fiscal deficit is already more than 2 percent of gross domestic product and compounded by falling iron ore prices.

Treasurer Joe Hockey said Wednesday that tax rates should not be set at levels that drive talented foreigners away.

“Lower taxes provide a great conduit for new investment and entrepreneurship,” he said. “Talent will always gravitate towards wherever the reward is greatest.”

Housing Glut?

Then there’s housing.

The central bank’s 2 percent cash rate has fueled a surge in property prices in the two biggest cities, Sydney and Melbourne, prompting a building boom as construction companies cash in. Policy makers have hailed the home building boost as a means to ease supply shortfalls and soak up former mine workers.

But Goldman now sees the potential for a property glut as population growth slows. Its revised demographic estimates point to an excess of 75,000 dwellings by 2017 rather than a previously forecast shortfall of 140,000.

The slowdown in population growth is a headache for RBA Governor Glenn Stevens.

“It represents a weakening of one of the key fundamentals the RBA has highlighted as supporting a pickup in non-mining investment,” McIntyre said.

[newbie11]

I do regret letting my AU PR lapse

[greengiraffe]

I like yr honesty as many of my mates who went said that there are no regrets... houses and cars cheap plus clean air, big country and plenty of options as long as one is hardworking... I oso jealous as life is too short to keep working hard just because some people says that we are not hardworking enough...

I do regret letting my AU PR lapse

[greengiraffe]

Consumer confidence slumps on China, Greece woes
AAP JULY 15, 2015 10:55AM

Consumer confidence has sagged to its lowest level in seven months due largely to concerns about China’s stockmarket and Greece’s debt woes.

The Westpac/Melbourne Institute index, released this morning, showed consumer sentiment fell by 3.2 per cent in July, after dropping 6.9 per cent in June.

The monthly index now sits at 92.2, its lowest point since December 2014.

Westpac chief economist Bill Evans was not surprised the index had fallen solidly in July.

“We had a taste for households’ sensitivity to disturbing news around European instability in December 2011 when the index tumbled by 8.4 per cent,” Mr Evans said.

“This time the concerns around Greece have been complemented by sensational coverage of the collapse in the Chinese sharemarket.”

Mr Evans said underlying consumer confidence in Australia remained consistently low, with three of the five subindices falling in the month.

The data comes after ANZ-Roy Morgan’s weekly consumer confidence index slipped to its lowest level in a year, also citing anxiety about China’s stockmarket and Greek debt.

[greengiraffe]

Jul 15 2015 at 4:01 PM Updated 1 hr ago

Businesses hit hard in post-boom WA

Mining and construction equipment has been hit hard by the downturn in mining. Philip Gostelow
by Aaron Bunch, Jonathan Barrett and Tess Ingram

West Australian mining equipment traders are selling machinery at less than half boom time prices, while lunch bars once frequented by engineers and other resources company staff are nearly empty.

A faltering state economy is linked to a dramatic pullback in mining investment, increased unemployment and, for the first time in recent memory, more people leaving to the eastern states than arriving.

Steven Sakich, sales manager of Smith Broughton Industrial Auctioneers, said demand for earthmoving, mining and construction equipment had been hit hard. Prices are at least 50 per cent below levels in 2011 and 2012, he said.

WA has been hit by the fall in the iron ore price.
WA has been hit by the fall in the iron ore price. Michele Mossop
"The larger mining equipment is a lot more difficult at the moment because at the end of the day, for someone to purchase it, it needs a job to go to," he said.

Mining investment in Western Australia has decreased in line with the falling iron ore price. The iron ore spot price has dropped to below $US50 a tonne from $US187 in February 2011. The state's unemployment rate is now at 5.8 per cent, up from a recent low of 3.5 per cent in 2012.

While there are some positive signs in the local economy – farmers are looking to cash in on a third straight year of good crops – the magnitude of the transition from a mining investment-driven economy to the far less labour-intensive production economy is hard to ignore.

Chris Phan, the store manager at Lunch Box in West Perth, said he had seen sales progressively drop since 2013. He said sales were down on two years ago even though his lunch bar was picking up customers from the local food court where food outlets had steadily closed in recent months.

'For Lease' signage in West Perth, a reflection of increased vacancies and over abundance of commercial office space.
'For Lease' signage in West Perth, a reflection of increased vacancies and over abundance of commercial office space. Philip Gostelow
"The local food court is pretty vacant at the moment; a lot of tenants are moving out," he said. "We've had a 10 to 15 per cent drop-off in terms of sales numbers. We've noticed lots of old faces aren't coming in any more. Just walking around West Perth there are heaps of vacancies and lots of empty shops."

West Perth is the city's traditional headquarters for small miners and explorers, which have been hit hardest. Office vacancy rates in the inner city are forecast to hit 20 per cent by year's end, according to the Property Council of Australia.

It is not all bad news for those who still have a stable income. During the boom, a shortage of workers and shop and office space meant the high cost of doing business was passed on to consumers.

This included exorbitant coffee prices. Perth still has the country's most expensive cappuccinos, according to analysis by coffee equipment supplier the Coffee Economist, but prices aren't rising any more.

Perth coffees don't come with gold flakes often, but they are the most expensive in the country.
Perth coffees don't come with gold flakes often, but they are the most expensive in the country.
"We've seen the coffee price in Perth plateau," Coffee Economist managing director Wayne Fowler said. "Operators aren't increasing their prices at the moment, and in some cases have decreased their price."

The company's cappuccino index puts an average Perth coffee at $3.89, compared with $3.32 in Sydney and $3.58 in Melbourne. Over the past five years, coffee prices have increased 11.8 per cent across the major cities, but just 4.9 per cent in Perth.

Western Australia was formerly the fastest growing state in Australia, as an iron ore price boom and major gas plant construction attracted workers from interstate and overseas. This put a strain on public infrastructure, but also underpinned housing demand and business growth.

Net immigration to the state has fallen from a peak of 56,291 in 2012 to just under 19,000 in 2014. A net 400 people left the state and moved east last year.

Ben Gibson, director of restructuring and finance at Tiger Asset Group, said distressed businesses that would have previously found a buyer were now landing in an asset sale scenario.
Ben Gibson, director of restructuring and finance at Tiger Asset Group, said distressed businesses that would have previously found a buyer were now landing in an asset sale scenario. Paul Kane
Businesses are trying to adapt. Dependable Laundry Solutions director Gabrielle Worthington said she had been supplying up to 100 washers and dryers a week to Pilbara mining camps until late 2013.

"It stopped dead in the water," she said. "We didn't see the effects of the GFC. We say here that 2013 and 2014 has been our GFC. I don't think [demand] is ever going to go back; these camps are built now."

She said the company was now trading more with the Northern Territory, and was also focusing on servicing laundry units.

Tiger Asset Group is viewing the deterioration of the mining boom from the front line. The asset disposition firm provides valuations and sell-off services to restructuring firms and banks, and opened an office in Perth in May to meet growing demand.

Tiger director restructuring and finance Ben Gibson said the company had been kept "pretty busy" and had already completed a number of sales as the downturn continued to snare victims.

He said distressed businesses that would have found a buyer a year or two ago were now selling assets. "It is not all big yellow equipment, although we have had a little bit of that. It has been mostly the support industry, so some transport stuff, some generators and compressors, and those kinds of support industries to the mining industry," Mr Gibson said.

The oversupply of mining and mining services equipment meant prices had been driven down by 50 per cent in some cases, he said.

"We put a 'forced liquidation value' on the assets when we get appointed by receivers or liquidators or work directly for bank and they will ask us what the worst case scenario is. This year, depending on the asset class, we are putting 30 to 50 per cent lower values on all of this type of equipment than what we would have put on it 12 to 18 months ago," he said.

"What we are finding is that we have to be more innovative and work harder to find the right buyers for some equipment."

Mr Gibson said Tiger was finding buyers overseas, particularly in Asia, and was working to sell some equipment into other industries. Buyers were also being inventive he said: one drilling company had recently teamed with an Asian private equity firm to pick up drill rigs on the cheap and "park the stuff up for 18 months" until conditions improved.

Some of the very subdued sentiment in Perth – household consumption is very low – appears to be of the state's own making.

The state lost its triple-A rating soon after the boom subsided, as expenses started to outstrip income, and rating house Standard & Poor's now says it has a one-in-three chance of losing its AA+ rating within two years.

The avoidable downgrade has added to general malaise, according to Bankwest chief economist Alan Langford, who said West Australians should not "scare ourselves into a recession we don't have to have".

He said the state would benefit from the fruits of the iron ore and gas project investment boom over the long term, which include long-term production and maintenance jobs and royalties.

West Australia is forecast to return to operating surpluses from 2017-18; although the debt burden will remain uncomfortably above $35 billion unless planned government asset sales can alleviate some of the burden.

Highways Traffic Management owner Jim Capelli said work generated out of several large infrastructure projects in Perth for his oversize transport escort company had offset work lost in the Pilbara.

"These projects that have occurred away from the mining industry have really come at the right time for us," Mr Capelli said.

Several major government-backed projects, including a new football stadium, waterfront precinct, airport expansion and new children's hospital, have kept construction and services companies busy in Perth, although the pipeline of work is diminishing.

Mr Capelli said he was fortunate not to invest too much during the mining boom. "During the course of doing business in the Pilbara I actually thought of moving north to open a sub-branch because you got the feeling it was never going to stop, but all of a sudden without really knowing, everything did stop," Mr Capelli said.

"And you wouldn't have known talking to the locals, they were saying, 'Oh no, this is a good place to invest'. It's just as well we didn't."

[greengiraffe]

Jul 16 2015 at 5:32 PM Updated Jul 16 2015 at 8:54 PM

Canada, NZ point to more RBA rate cuts, say economists

The RBA has left the door open to a further cut this year. Henry Zwartz


by Jacob Greber
A surprise interest rate cut in Canada and the prospect of a similar move next week in New Zealand have stoked speculation the Reserve Bank of Australia will follow suit later this year.

While the Reserve Bank remains reluctant to cut rates again, the direction taken by two of governor Glenn Stevens' closest global peers helped send the Australian dollar to a six-year low of US73.54¢ on Thursday.

Talk of another round of official rate cuts and signs the US Federal Reserve is getting closer to its long-awaited interest rate "lift off" mean the Australian dollar could fall as low as US60¢ by 2017, according to one prominent forecast.

The Bank of Canada's decision on Wednesday to cut its benchmark interest rate for a second time this year, to 0.5 per cent, and the Reserve Bank of New Zealand's likely cut next Thursday to 3 per cent is a reminder of how the world's three big English-speaking advanced commodity exporting economies face similar challenges now that global prices have collapsed.

Auckland property prices are up 17 per cent this year.
Auckland property prices are up 17 per cent this year. Photo: Bloomberg
Canada, New Zealand and Australia all face a need to lower their exchange rates to offset the pain caused by falling prices for their main exports – energy, iron ore and milk respectively.

Their central banks are also trying to make their economies more competitive and less reliant on a handful of key exports to enable other sectors such as tourism, education or manufacturing to pick up the slack.

"The ongoing adjustment in all three nations' terms of trade, which is underpinning lower national income growth, expenditure and living standards, remains the key narrative," said Su-Lin Ong, a senior analyst at Royal Bank of Canada in Sydney.

She said the Bank of Canada's cut and likely cuts in New Zealand in coming months supported her view that the RBA will be forced into easing monetary policy again.


"We expect the RBA to sit on its hands for a few more months yet, but it is also hard to see how the underlying terms of trade dynamics and mining capex unwind result in anything but persistent sub-trend growth, stagnant wages, and ultimately a lower cash rate," she said.

The prospect of another official interest rate cut – which stands at a 64 per cent chance by the end of the year, according to interest rate futures pricing – reflects the mixed signals being generated by economic data.

While business sentiment has improved since the May budget, consumer confidence has tanked, particularly after this month's standoff over Greece, and China's sharemarket.

Joshua Williamson, a senior economist at Citigroup, noted that the Bank of Canada has justified its cut because its economy faces a "significant and complex adjustment" and is keen to shift Canada's reliance on energy to "non-energy output".

"That sounds very similar to what's happening here in Australia," he said, alluding to the Reserve Bank's repeated call for more "non-resources" economic growth.

The Bank of Canada, like its Aussie and Kiwi counterparts, also signalled that it believes the need for greater macroeconomic stimulus should take precedence over financial stability.

Despite concerns about overheating property markets in Toronto, Auckland or Sydney, all three banks have reached for regulatory limits on banks to try to stem potential bubbles.

"The BoC decision and what they've said about it is a blueprint for next week's RBNZ decision," Mr Williamson said.

"Both are seeing declining income from falling export prices. Australia is also a commodity producer and we're seeing the BoC and RBNZ react to that by trying to competitively devalue their currency by cuts to monetary policy."

Citigroup expects the Reserve Bank to remain on hold next month but cut the official cash rate from its current record low of 2 per cent to 1.75 per cent in November.

Ironically, recent falls in the Australian dollar, which traded above US94¢ less than a year ago, have given the Reserve Bank scope to delay another cut.

Deutsche Bank economist Adam Boyton predicts the dollar will fall to US65¢ by the end of next year, with the impact of recent declines likely to impact the economy increasingly incoming months.

"It takes a while for the economy to adjust to a lower exchange rate, if you think about the sector that probably should adjust most rapidly, tourism, our work suggests it takes about a year to 18 months to see much of an impact," he said.

"We're starting to see the impact of the decline in the currency over the past year; we should feel that increasingly over the coming months."

"What hopefully we'll see come our summer is that the US recovery has enabled the Fed to tighten, that's lifting the US dollar, that's helping other people depreciate and the rest of the world to ride on the US economy's coat-tails."

And Dino Spinelli, UBS head of foreign exchange sales in Australia and New Zealand, said, "To think about what Canada did last night and assume the RBA's likely to cut in the next few months because of that is a dangerous game. They're still reluctant cutters, they really are. It's an argument for them to wait and see."

WITH VESNA POLJAK

[greengiraffe]

Dollar’s fall to average value lifting economy: RBA’s John Edwards
JAMES GLYNN THE AUSTRALIAN JULY 17, 2015 12:00AM

 
Dollar values. Source: TheAustralian

The fall in the dollar to near its post-float average is beginning to lift the economy, according to ­Reserve Bank board member John Edwards.

The dollar fell yesterday to a six-year low of US73.5c as tensions in global markets eased after the Greek parliament approved a eurozone bailout package, and US Federal Reserve chairwoman Janet Yellen signalled that an ­interest-rate increase this year remained likely. The three-decade average of the dollar since it floated is US76.43c.

“We are getting into a range (for the dollar) now, in terms of our cross-rate with the US dollar, where we are getting back to our average level over the period since the (1983) float,” Mr Edwards said.

“We haven’t seen as big a move in trade-weighted terms … I certainly think we’ve got room to move (lower) in a trade-weighted sense. There is no firm way of saying what level is appropriate, except to say to see it a bit cheaper is good,” Mr Edwards added.

Mr Edwards’ comments suggest that further weakness in the dollar is now more desirable against the yen and euro, currency crosses that have proved much less flexible with Japan and European authorities continuing to pursue large asset-buying programs.

Australia’s central bank has long jawboned for a lower dollar, which soared to historic highs above parity with the US dollar at the height of a commodity price boom in 2011, before beginning a slow grind lower in subsequent years as commodity prices, ­particularly iron ore, dropped sharply.

Mr Edwards said the benefit of the fall in the Australian dollar against the US dollar was now evident in strong export growth for resources, farm produce and services industries.

That export volume growth has helped to soften the income shock to the economy.

RBA governor Glenn Stevens said late last year that US75c would be an appropriate level for the currency, but since then commodity prices have continued to fall and interest rates have been cut twice.

Mr Stevens said at the start of the month that a lower dollar was both necessary and likely.

Asked if recent global financial market and economic turmoil had added to risk to Australia’s economic outlook, Mr Edwards said news from overseas was ­generally favourable in recent weeks.

“On the whole, over recent days, we could be a little more reassured about the global outlooks,” Mr Edwards said.

Chinese GDP growth data was better than expected, while signals from the US Federal Reserve indicated it remained on track to lift interest rates this year, he said.

“The decline in China’s economy may have been slowed on the most recent numbers,” he said, adding: “The sooner the Fed moves, the better for us.

“On the whole, over the last couple of weeks, you would have to say the global outlook has improved a bit.”

Australia’s falling unemployment rate was a surprise, but it was too soon to say that it would not go higher again. The unemployment rate has fallen to 6 per cent this year, despite RBA predictions it would rise to 6.5 per cent in the next year.

New RBA economic forecasts will be published in early August.

“I would have expected it to be higher now than it is, so I’m a bit reluctant to say that it is not going to go up, even though I expect economic growth to remain reasonably firm,” Mr Edwards said. “Maybe we are going to be favourably surprised again if the sharp slowdown in underlying population growth continues.”

Mr Edwards said a slowdown in Australia’s population growth had eased supply to the job market, helping to lower the jobless rate. “A slowdown in net migration is contributing to a somewhat small number than you would have expected given our rate of growth,” he said.

[greengiraffe]

RBA has no compelling case to cut interest rates further
THE AUSTRALIAN JULY 20, 2015 12:00AM

David Uren

Economics Editor
Canberra

Economic profiles Source: TheAustralian
The widespread view that the Reserve Bank will cut its benchmark cash rate further to 1.75 per cent before the end of the year will only prove correct if there is a marked deterioration in the economy sending the jobless rate higher or if the core measures of inflation reported this week are much weaker than expected.

The surprise rate cut by the Bank of Canada last week, lowering its official rate to 0.5 per cent, and the cut expected from the Bank of New Zealand this week, bringing its rate down to 3 per cent, have focused market attention on the vulnerability of the commodity exporting countries in the “Anglosphere”.

Citigroup economists Paul Brennan and Josh Williamson were among several highlighting the stance of the Canadian and New Zealand central banks, commenting that these moves “are reminders of how weak commodity prices are driving downward pressure on rates in the USD bloc”.

Financial markets drew some relief last week from the progress in establishing a new bailout package for Greece and the apparent tranquillity in Chinese equity markets alongside better than expected Chinese growth numbers.

However, they are still putting a 60 per cent chance on the Reserve Bank cutting its benchmark rate for a third time this year within the next four months.

There are some clear parallels between Australia and New Zealand and Canada. All have suffered big falls in their terms of trade (export prices compared with import prices) as markets for their principal commodities — oil in the case of Canada, milk for New Zealand and iron ore and coal in Australia — have weakened. Each had enjoyed an investment boom while prices were high and is facing a collapse in business investment as the price cycle turns.

Australia looks worse than its peers on these metrics. Its terms of trade has dived 28 per cent compared with a 10 per cent drop in Canada and a 5 per cent fall in New Zealand. These are first-quarter numbers, and New Zealand will look worse in the second quarter with the price of milk, which is almost 30 per cent of its exports, dropping sharply in the past few months, but Australia’s terms of trade has also fallen further. Investment has fallen further in Australia as well, with the prospect of further decline as the giant LNG projects in Queensland, Western Australia and Northern Territory draw to a close.

And yet, Australia’s economy is performing better. Canada’s economy contracted 0.6 per cent in the March quarter and is many expected it to contract again in the June quarter, meeting the formal description of a recession.

New Zealand’s economy had been booming through 2015, but the quarterly growth slid abruptly to 0.2 per cent in the March quarter as the economy reacted to drought and lower milk prices.

Australia, by contrast, recorded a much better than expected 0.9 per cent in response to surging exports and a housing construction boom. One difference is the way in which the downturn of investment ripples through the rest of the economy. In New Zealand, the price fall is recent — dairy ­prices were at record levels with milk powder at just under $US5000 a tonne until February but is now down to $US1850. Farms can cut their investment rapidly, and the fall immediately affects ­surrounding communities, influencing consumer spending.

Canada’s oil and gas industry also reaches deeply into the economy, drawing supplies from local manufacturing industry, whereas much of Australia’s iron ore and coal expansions and most of its LNG development rely on imported supplies.

Where Australia’s major iron ore producers are among the lowest-cost producers in the world, Canada’s oil tar sands requires high oil prices to be profitable. The fall in the oil price has a direct depressing effect on output whereas the falling prices create an incentive for BHP Billiton and Rio Tinto is to raise output.

The high level of foreign ownership in the Australian resources industry also means that more of the shock of the downturn in commodity prices is felt by offshore ­equity-holders than is the case in Canada or New Zealand.

There are other points of parallel besides resources. The three countries have all had housing booms. The Canadian and NZ authorities have used more forceful macroprudential or regulatory controls to cap their housing ­prices, where Australia has relied on less formal pressure from the banking regulator, the Australian Prudential Regulation Authority.

Perhaps the biggest difference is the performance of the non-resource economy. Non-resource investment is weak in each country, but dynamism of business in NSW and Victoria has been striking and was underlined in the National Australia Bank business survey last week. Reporting the best business conditions in those two states since 2007, business is hiring and sales are strong.

It is hard to envisage the RBA cutting rates further while the two biggest state economies are running so strongly. The bank cut rates in both February and May without clear sign that unemployment was rising, although it was confident in its forecasts that it would. The cuts were mainly driven by the prospective weakness in business investment which was expected to result in higher unemployment. However, the job loss has not occurred, partly because wage growth has been modest, partly because lower immigration has acted as a buffer, and partly because business is making reasonable profit. The forthcoming profit season is not expected to break records, but there have been fewer downgrade warnings ahead of the results than in recent years.

The case required for a further cut when rates are already so low has to be compelling, and would be hard to make while monthly employment growth continues at a good level and the employment to population ratio continues to drift slowly higher.

The one thing that could change this would be a fall in core levels of inflation to a level which had the effect of raising the real rate of interest. Weak inflation is one of the reasons Canada and New Zealand are cutting. The annual rate of inflation in Canada is down to 0.9 per cent and in NZ it is 0.3 per cent.

The RBA expects its preferred measures to drop from the 2.4 per cent of the March quarter to 2.25 per cent in the June quarter, due this week, before lifting through the year to 2.5 per cent by December. Were inflation to look like heading below 2 per cent instead, the bank could be expected to compensate to preserve the level of real interest rates.

Jul 16 2015 at 5:32 PM Updated Jul 16 2015 at 8:54 PM

Canada, NZ point to more RBA rate cuts, say economists

The RBA has left the door open to a further cut this year. Henry Zwartz


by Jacob Greber
A surprise interest rate cut in Canada and the prospect of a similar move next week in New Zealand have stoked speculation the Reserve Bank of Australia will follow suit later this year.

While the Reserve Bank remains reluctant to cut rates again, the direction taken by two of governor Glenn Stevens' closest global peers helped send the Australian dollar to a six-year low of US73.54¢ on Thursday.

Talk of another round of official rate cuts and signs the US Federal Reserve is getting closer to its long-awaited interest rate "lift off" mean the Australian dollar could fall as low as US60¢ by 2017, according to one prominent forecast.

The Bank of Canada's decision on Wednesday to cut its benchmark interest rate for a second time this year, to 0.5 per cent, and the Reserve Bank of New Zealand's likely cut next Thursday to 3 per cent is a reminder of how the world's three big English-speaking advanced commodity exporting economies face similar challenges now that global prices have collapsed.

Auckland property prices are up 17 per cent this year.
Auckland property prices are up 17 per cent this year. Photo: Bloomberg
Canada, New Zealand and Australia all face a need to lower their exchange rates to offset the pain caused by falling prices for their main exports – energy, iron ore and milk respectively.

Their central banks are also trying to make their economies more competitive and less reliant on a handful of key exports to enable other sectors such as tourism, education or manufacturing to pick up the slack.

"The ongoing adjustment in all three nations' terms of trade, which is underpinning lower national income growth, expenditure and living standards, remains the key narrative," said Su-Lin Ong, a senior analyst at Royal Bank of Canada in Sydney.

She said the Bank of Canada's cut and likely cuts in New Zealand in coming months supported her view that the RBA will be forced into easing monetary policy again.


"We expect the RBA to sit on its hands for a few more months yet, but it is also hard to see how the underlying terms of trade dynamics and mining capex unwind result in anything but persistent sub-trend growth, stagnant wages, and ultimately a lower cash rate," she said.

The prospect of another official interest rate cut – which stands at a 64 per cent chance by the end of the year, according to interest rate futures pricing – reflects the mixed signals being generated by economic data.

While business sentiment has improved since the May budget, consumer confidence has tanked, particularly after this month's standoff over Greece, and China's sharemarket.

Joshua Williamson, a senior economist at Citigroup, noted that the Bank of Canada has justified its cut because its economy faces a "significant and complex adjustment" and is keen to shift Canada's reliance on energy to "non-energy output".

"That sounds very similar to what's happening here in Australia," he said, alluding to the Reserve Bank's repeated call for more "non-resources" economic growth.

The Bank of Canada, like its Aussie and Kiwi counterparts, also signalled that it believes the need for greater macroeconomic stimulus should take precedence over financial stability.

Despite concerns about overheating property markets in Toronto, Auckland or Sydney, all three banks have reached for regulatory limits on banks to try to stem potential bubbles.

"The BoC decision and what they've said about it is a blueprint for next week's RBNZ decision," Mr Williamson said.

"Both are seeing declining income from falling export prices. Australia is also a commodity producer and we're seeing the BoC and RBNZ react to that by trying to competitively devalue their currency by cuts to monetary policy."

Citigroup expects the Reserve Bank to remain on hold next month but cut the official cash rate from its current record low of 2 per cent to 1.75 per cent in November.

Ironically, recent falls in the Australian dollar, which traded above US94¢ less than a year ago, have given the Reserve Bank scope to delay another cut.

Deutsche Bank economist Adam Boyton predicts the dollar will fall to US65¢ by the end of next year, with the impact of recent declines likely to impact the economy increasingly incoming months.

"It takes a while for the economy to adjust to a lower exchange rate, if you think about the sector that probably should adjust most rapidly, tourism, our work suggests it takes about a year to 18 months to see much of an impact," he said.

"We're starting to see the impact of the decline in the currency over the past year; we should feel that increasingly over the coming months."

"What hopefully we'll see come our summer is that the US recovery has enabled the Fed to tighten, that's lifting the US dollar, that's helping other people depreciate and the rest of the world to ride on the US economy's coat-tails."

And Dino Spinelli, UBS head of foreign exchange sales in Australia and New Zealand, said, "To think about what Canada did last night and assume the RBA's likely to cut in the next few months because of that is a dangerous game. They're still reluctant cutters, they really are. It's an argument for them to wait and see."

WITH VESNA POLJAK

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Contrary to common myth, remaining employment in mining sector only amounted to 1% of Aussie population...

Bleak outlook for mining workers as more jobs set to go
THE AUSTRALIAN JULY 29, 2015 12:00AM

Matt Chambers

Resources Reporter
Melbourne

More Australian mining jobs are set to go this financial year as the industry prepares to weather protracted low prices, with a survey of executives offering a bleak outlook and a growing number intending to cut workers this year.

While more than 38,000 ­local industry jobs have already gone in the post-boom downturn, Newport Consulting’s annual survey of 50 mining executives shows more job cuts and closures are on the way.

According to the survey, 80 per cent are planning to reduce their headcount in 2015-16, up from 50 per cent a year ago.

The job cuts have been flagged despite a small rebound in optimism from the previous survey, with 16 per cent of the respondents saying they are cautiously optimistic about growth prospects, more than double the amount last year.

Newport managing director David Hand said the optimism was borne out of increased productivity and the ability to make spending and job cuts, rather than an expected rebound in prices. “The optimism we see is that miners have been quite entrepreneurial in making the changes they need to survive what they see as a long, protracted period of low commodities prices,” Mr Hand told The Australian.

“On the down side, supply chains are suffering, employment is suffering, mines that cannot be run profitably are being closed and there are a lot more redundancies coming.”

In the Mining Business Outlook report for 2015-16, to be released today, Newport says large-scale cost-cutting, spending cuts, mine closures, cancelled projects and job cuts that the industry has been pursuing of late are expected to continue.

According to ABS data, quoted in the report, mining jobs have already fallen by 38,000 between May 2012 and December last year, leaving total mining sector jobs at 237,000.

Job cuts, spending cuts and productivity drives have been pursued by most miners in the past two years as they cut boomtime fat that had crept into their organisations, refocus previous energy that has been directed at growth and try to remain profitable in the downturn.

While miners with lower-cost operations are feeling optimistic that the measures they have made, helped by a falling Australian dollar, will see them through the boom, others feel they have done all they can.

One unnamed executive quoted in the report said his company was done with spending cuts and would soon need to close mines. “We will maintain controls on spending, capital expenditure is at a minimum and we have made redundant thousands of people,” the executive said. “We don’t believe we can cut more. If the market does not improve, we will close mines and put them on a care and maintenance regimen.”

One interesting aspect of the report was a prediction that the opaque take-or-pay rail and port contracts that have been keeping coalmines open longer than most had expected were being renegotiated, which could mean more mine closures.

“Miners are renegotiating their take-or-pay contracts, which will have a contracting impact of more mine closures and a fall in revenue and profitability for the rail, port and shipping companies as the mining downturn continues to bite,” Mr Hand said in the report.

The contracts, under which miners pay for rail and port cap­acity whether it is used or not, have meant it has been less costly to keep some unprofitable mines open, rather than pay the freight contracts without selling coal.

Illustrating how opaque the contracts are, BHP Billiton coal chief Mike Henry told The Australian this month that part of the reason the company, the world’s biggest coking coal exporter, underestimated the potential for depressed coking coal prices was that it did not know the extent of the industry’s take-or-pay commitments.

It is believed major coal haulers Asciano and Aurizon do not have major contracts coming up for renewal over the next year. But both have said they are willing to work with customers struggling under their commitments.

Newport says that for the first time in the five years of the ­survey, miners are reasonably satisfied with the federal government. The biggest desire for government action was in industrial relations, with 53 per cent of the executives calling for labour reform and 47 per cent calling for limits to be put on union power.