Australian Economic News

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Street fighter recognises hard economic times - Western Australia

Julie-anne Sprague
681 words
21 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Billionaire Perth-based businessman Kerry Stokes says economic conditions in his home state are the worst in nearly 25 years.

Mr Stokes, speaking after the launch of his authorised biography attended by a who's who of Perth business on ­Monday, also backed the controversial strategy by the world's two biggest ­miners to ramp up iron ore production.

Glencore, Fortescue Metals Group and West Australian premier Colin Barnett have blamed BHP Billiton and Rio Tinto for pushing down already weak iron ore prices by ­boosting production.

Mr Stokes, who is set to emerge with 19 per cent stake of BC Iron following the takeover of his Iron Ore Holdings ­minnow, said the mining industry needed to be more efficient.

"They [BHP and Rio] are pretty big smart cats," Mr Stokes said.

"Frankly if you can sell something at $80 a tonne that cost you $20 a tonne you might want to sell as much as you can. I understand that," he said.

"That means everybody else who competes has got to get a whole lot more efficient."

Mr Barnett earlier this month lashed the big miners and blamed the ­plunging iron ore price and dwindling income from the goods and services tax for forcing a fresh round of public ­sector cuts.

Payroll tax income is also softening as business conditions ease after a ­decade-long mining investment boom.

The West Australian government is selling assets and cutting costs to plug a $2 billion hole in the forecast ­mining royalties.

Mr Stokes offered a blunt assessment of the state's economic climate.Tough economic cycle phase

"We are in a really tough period," Mr Stokes said.

"Probably, this is as tough as I've seen since 1991. People are saying to me how bad does it get? In 1991 the three [TV] networks in Australia all lost money. Every network in Australia lost money. In 1991 WesTrac had a horrible year. This is shaping up like that period."

But Mr Stokes remained upbeat about the long-term outlook, but wants business and government to cut costs while engineering other forms of employment. "We have to cut our costs as a state and as companies," Mr Stokes said.

"We have to become efficient. We have to find other forms of employment to pick up the slack and then we have to work our way through this and within two years, if we do that, we will be back on the road again. It's about the cycle."

Mr Stokes said he decided to ­commission his life story because ­others had begun writing about him.

He did not co-operate with a biography written by journalist Margaret Simons, Kerry Stokes: A Self-Made Man published last year.

He said if he could choose the author to write his story it would be a better outcome for him. Summer holiday readingMr Stokes said he planned to read the book, The Boy from Nowhere, by ­journalist Andrew Rule, over the Christmas break.

It chronicles colourful events from the deeply private businessman's rags to riches life, including fist fights on the streets of Carlton, in inner Melbourne. Mr Stokes left ­Melbourne for Perth when he was 19.

"We fought street by street and they were bloody battles," Mr Stokes told the Perth audience.

"We hated those 'wogs', as we called them. We hated them, because they were working at the wool stores for non-union wages and they were ­cooking thistles and eating off the smell of an oil rag."

Documenting his life in a book was not a sign, he said, that he had any­ ­intention to retire. "I hope not," he said. "Maybe it's just chapter one."

He said he wanted to stay involved in his businesses "as long as I enjoy it".

Spotted in the crowd were James Packer, entrepreneur Dallas Dempster, Nicola Forrest, Seven West director Peter Gammell, boxer Danny Green and Tim Roberts, who made a fortune when Brookfield bought his late father's property group, Multiplex.


Fairfax Media Management Pty Limited

Document AFNR000020141020eaal0002j

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Wage growth at its slowest in 25 years
THE AUSTRALIAN OCTOBER 27, 2014 12:00AM

David Uren

Economics Editor
Canberra
Changes in labour cost.
Changes in labour cost. Source: Supplied
LABOUR costs are rising at their slowest rate of the past 25 years, with the exception of a brief period during the financial crisis, as wage increases are tempered by fears of unemployment.

The National Australia Bank’s latest quarterly business survey shows business labour costs have been rising at an average annual rate of just 1.5 per cent since the last quarter of 2012, or just under 0.4 per cent a quarter. The survey shows that business expects increases in labour costs to remain at about this level into next year.

Over the decade before the ­financial crisis, labour costs rose at an average level of 3 per cent a year and never less than 2 per cent.

Although the official labour force survey has shown only a modest increase in unemployment, the suppression of labour costs shows there is considerable slack in the economy and that growth is running considerably below its long-term trend.

In the absence of wage growth, the only thing supporting consumer demand has been increased wealth as a result of ­rising house and, until recently, share prices.

If, as seems possible, house prices are levelling out in the hot areas of Sydney and Melbourne, the consumer economy could soften.

The NAB survey is consistent with other measures of wages and household incomes. The wage price index rose at an annualised rate of just 1.7 per cent in the first half of this year, compared with a long-term average of 3.6 per cent. Enterprise bargains are still being concluded with average increases of 3.3 per cent. However, this is also trending lower from a historic average closer to 4 per cent.

The University of Canberra’s social and economic modelling centre, NATSEM, analysed household incomes and budgets and found that in the year to June, household incomes went backwards by 0.2 per cent after accounting for cost-of-living increases.

Over the past two years, living standards have fallen by 2 per cent, a dramatic contrast to the five years prior to the global financial crisis when incomes rose by an average of 3 per cent a year, after accounting for inflation.

Last week’s September quarter consumer price index showed that the low growth of labour costs is now flowing through to prices. Again excepting the period of the global crisis, the domestic component of inflation was the lowest since 1999 at 2.4 per cent.

The abolition of carbon tax contributed to this. However, the fall in utility costs was largely offset by rising fruit and vegetable costs, which rose by 14 per cent. Wages are about half the economy, so the fall in wage growth is affecting most domestic costs.

Inflation in imported goods was also very low, despite the fall in the value of the Australian dollar of about 4 per cent. Lower oil prices were the main reason for this; however, clothing prices fell sharply, while cars have not been as cheap since 1988.

Demand is weak and companies are reluctant to push through increases in the cost of imports. The NAB survey shows companies are lifting final product prices by an annual average of only 0.6 per cent.

Although it does not get a lot of attention, the seasonally adjusted consumer price index rose by only 0.1 per cent in the September quarter. This is consistent with a global trend — the OECD’s inflation measure across advanced economies fell from an annual rate of 2.1 per cent through to June to 1.8 per cent to August.

Concern about job security is contributing to the low level of wage settlements. The consumer sentiment survey by Westpac and the Melbourne Institute includes a question about prospects for employment. Westpac’s senior economist Matthew Hassan says the current unemployment expectations index measure of 149 points is well above the long-term average of 130 points and is the sort of level which, over the past 40 years of the survey, has only been seen if you were entering a recession. However, it has now been consistently elevated for about two years.

A broader survey exploring what issues are making consumers anxious, which the NAB conducts on a quarterly basis, puts concerns about job security well behind the cost of living, adverse government policy and the ability to fund retirement. It is predictably the medical bills and the monthly household bills that are causing the greatest concern.

People say they are spending more on utilities and paying off debt, and less on entertainment, eating out, major household purchases and charitable donations.

Retail sales still look firm on an annual comparison, but all the growth was in the December and March quarters, when the change of government was accompanied by a burst of optimism about global recovery and a surge in house prices. Westpac’s Mr Hassan says that over the June and September quarters, retail sales volumes have been rising at an annual rate of only 0.5 per cent, which represents a contraction in per capita terms.

Mr Hassan says it is surprising, given the strength of the housing market, that there hasn’t been more of a wealth effect on retail spending. Household savings rates have come down over the past couple of years, but appear to have flattened over this year. Normally, when households feel wealthier, they are prepared to spend out of their savings.

Westpac’s consumer survey also asks whether now is a good time to buy a house. That had been generating very positive results, but there was a sharp fall in October, possibly reflecting speculation that the Reserve Bank might be preparing a “macro-prudential” response to what it sees as excessive investor demand.

The official labour force survey is suffering unprecedented reputational damage as a result of the wild results of the past three months following changes to the survey and the bureau’s decision to suspend seasonal adjustment for the September survey.

However, the consistent trend has been very weak growth in full-time employment, which averaged an annual rate of increase of only 0.1 per cent over the past 18 months, against a reasonable growth of 2.3 per cent in part time work. The total hours worked has shown almost no growth at all for the past three years.

The Australian Bureau of Statistics estimates that 14.4 per cent of the labour force is being underused, either working fewer hours than they would like or unemployed altogether.

This is the highest level since late 1996 and shows the economy is adding to its idle capacity.

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$50bn pipeline boosts Australia’s M&A ranking
THE AUSTRALIAN OCTOBER 27, 2014 12:00AM

Bridget Carter

Mergers and Acquisitions Editor
Sydney
Growth focus
Growth focus Source: TheAustralian
A PIPELINE of infrastructure ­assets worth more than $50 billion being placed on the market by governments has propelled ­Australia up the list for the countries where acquisitions are most sought after.

Ernst and Young’s latest bi­annual Australasian Capital Confidence Barometer indicates Australia was now the sixth most favoured destination for acquisitions, compared to the 21st just six months ago.

“Part of it could be people looking at the upcoming government asset sale program, but also the Asia springboard opportunity,” said Graeme Browning, Ernst and Young’s managing partner of Transaction Advisory Services for Oceania.

It is part of an overriding global trend, where the top destinations for global investment have shifted more towards mature markets, with Britain moving from fourth to No 1, ousting China.

Australian companies, meanwhile, are most focused on the US, China, India, Britain and Malaysia when it comes to acquisition opportunities.

As part of the report, the financial firm surveyed 1600 globally, including 157 from Australia and New Zealand, with 61 per cent of the participants having a $1bn-plus annual turnover.

Mr Browning said there were 66 per cent of local respondents expecting to pursue acquisitions in the next year, which was around double the level six months ago.

He said takeovers such as the mooted $1bn bid for Transfield Services by Spanish construction giant Ferrovial would set the ball rolling for a string of other transformational deals.

“You are starting to see it in a range of mining services deals … such as Transfield and speculation of (mining giant) Rio Tinto being a takeover target.”

Groups were planning to buy growth through M&A transactions, given gross domestic product growth was expected to be modest.

The activity increase was partially due to the local market operating on a different point in the cycle to the rest of the world, he said. Two thirds of respondents would increase debt levels to pay for the businesses.

“Companies have other demands on their cash, including dividends and share buybacks, which have climbed even higher on the boardroom agenda in response to shareholder activism.”

Among the survey’s respondents, 74 per cent expected the local M & A market to improve over the next 12 months, while 73 per cent have the same view of the global market.

There were 65 per cent who expected asset prices to remain at current levels in the next year.

Anticipated deal values, however, had fallen, with 93 per cent of local respondents forecasting maximum single deal values to be less than $250 million and 70 per cent less than $50m, the survey indicates.

Local executives were more concerned about deal execution and integration than their global counterparts, with 34 per cent citing it as the main challenge, and almost a third of local executives said they had over-estimated the strategic value of the asset.

The top four drives of M&A strategy included moving into new geographical markets, reducing costs or improving margins, moving into new product service areas, accessing new technology or intellectual property.

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Consumer confidence hits 12-week high
AAP OCTOBER 28, 2014 9:45AM

Australians are becoming more upbeat about the economy as worries about the federal budget fade and the sharemarket rallies.

The ANZ-Roy Morgan consumer confidence index rose 2.7 per cent last week, hitting its highest level in 12 weeks.

Expectations about the economic outlook had a 10 per cent bounce after being at subdued levels following the harsh federal budget in May.

ANZ chief economist Warren Hogan said the lift in consumer confidence combined with a rise in non-mining business investment were good signs for the economy.

"However, consumer confidence clearly remains fragile and we will continue to monitor confidence closely for an early-read on consumption into the fourth quarter of the year," he said.

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Falling Aust dollar boosting economy
AAP OCTOBER 29, 2014 11:30AM

The falling Australian dollar is starting to have an impact on the local economy, giving company revenues a boost.

The days of the Australian currency being stronger than the US dollar are well and truly over after it fell below $US1 in May and reached 86.43 US cents early in October, its lowest point for 2014.

A lower exchange rate helps to make Australian exports cheaper and increases the competitiveness of locally-made goods with imported products.

Commonwealth Bank economist Diana Mousina said the Australian dollar's 10 per cent fall alone would boost economic growth up to one per cent over the next two years.

"Businesses with a high export propensity or high import penetration will benefit the most," she said.

"The main winners from a lower currency, from an income sense, will be company profits and government tax revenues."

It is also one of the reasons why the CBA recently moved its forecast for a Reserve Bank interest rate hike from February to August.

Ms Mousina said the lower exchange rate was starting to act as a buffer to the fall in the prices of our mining and resource exports.

"Our commodity prices index has fallen by nine per cent over the past three months in US dollar terms, but is only two per cent lower in Australian dollar terms," she said.

JP Morgan economist Tom Kennedy said the weaker Aussie dollar helped but was only the first piece in the puzzle to help the sluggish retail sector.

"While a weaker Australian dollar improves domestic retailers' competitiveness, we think the currency's recent declines are far from a game-changer for the embattled sector," he said.

"We view modest wage growth, weak consumer confidence, and elevated unemployment as the major constraints to any sustained pick-up in household spending."

The Australian dollar's recent fall was mainly due to the US dollar getting a boost from an improving American economy and that the US Federal Reserve was considering its first interest rate hike in nine years.

Further indications on the timing of the Fed's rate rise are expected the central bank's boss Janet Yellen holds a press conference early on Thursday morning, Australian time, after its regular policy meeting.

LTG GoldRock director Andrew Barnett is confident the Australian dollar will stay around its current levels or even go a little lower this year because the US rate hike is inevitable.

"She realises that she's going to have to raise rates at some point next year if the current economic trends continue.

"I think the smart money will speculate on higher rates and push that US dollar higher," he said.

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Still some kick to mining boom
THE AUSTRALIAN OCTOBER 30, 2014 12:00AM

David Uren

Economics Editor
Canberra
THE end of the resources construction boom may be coming, but it has not arrived yet, with resources projects worth $240 billion being built or with firm commitments, while spending on infrastructure is starting to lift.

Across the nation, investment projects worth $459bn are under way, which is down by just 1.2 per cent on the value of projects a year ago, according to the Deloitte Access Economics.

The value of firm projects has now been holding at above $400bn for three years, but the firm cautions that the total will start tailing off sharply over the next 12 months as the giant LNG projects approach completion.

The overall value of projects ­either under construction or with firm commitments is being lifted by cost inflation at some of these LNG ventures.

The Gorgon project near Western Australia’s Barrow ­Island is now expected to cost $61bn, up from $52bn a year ago, while the cost of Queensland’s Curtis project, which will be the first to start producing late this year, has risen from $19.6bn to $21.5bn, partly reflecting the fall in the value of the dollar.

In iron ore, Gina Rinehart’s $10bn Roy Hill project has received funding, while the $7.4bn West Pilbara iron ore project has been strengthened with the Chinese steel company, Baosteel, joining Aurizon on the project. However, no other iron ore projects are expected and overall investment will start to decline.

The picture is similar in the coal industry which, like iron ore, is battling prices that are much weaker than expected.

The firm believes there will be a need for additional port infrastructure. Coal projects under way will add another 60 million tonnes a year of production capacity while iron ore projects will add a further 80 million tonnes. However, port infrastructure under construction will only accom­modate another 110 million ­tonnes a year.

“That suggests that a number of projects in the planning phase will need to go ahead to prevent bottlenecks occurring,” the firm said.

State governments are boosting their transport infrastructure spending. Definite road projects worth $42.2bn are only 2.9 per cent ahead of last year, but there has been a 24.9 per cent jump in planned road projects. Definite rail spending is up by 154.8 per cent to $32bn. There are $11.9bn in water projects under way but, with the commonwealth’s new focus on dams projects, there are $51.6bn of projects in the planning stage.

Western Australia is still host to the largest number of definite projects, with a total worth $140bn, followed by Queensland at about $110bn. NSW and Victoria follow with definite projects worth between $35bn and $40bn.

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Mining boom’s impact revealed in new report
THE AUSTRALIAN NOVEMBER 03, 2014 12:00AM

Eli Greenblat

Senior Business Reporter
Melbourne
A FRESH report on the impact of the resources boom has demolished assertions the mining sector contributed only 3 per cent to Australia’s GDP, using Reserve Bank modelling to pinpoint the mining sector’s actual contribution as a 14 per cent lift in the national income.

Fixing glaring omissions and errors that featured in previous analysis of the once-in-a-generation boom, new research by Jonathan Pincus, a professor of economics at the University of Adelaide and former adviser to the Productivity Commission, has proved the resources sector drove wealth throughout the wider economy thanks to a rising Australian dollar that enriched consumers.

Professor Pincus has argued that higher prices for commodities were not only good for the mining sector and its immediate workers but also benefited wider sectors of the economy, as a higher exchange rate redistributed the benefit of steeper export prices to shoppers as they purchased imports.

Published by the Minerals Council of Australia today, Professor Pincus has backed his ­argument with data from the Australian Bureau of Statistics and Reserve Bank modelling to reveal the mining boom unleashed enough wealth in the community to boost national ­income by 14 per cent.

Professor Pincus’s findings are in stark contrast to a recent report by John Edwards, published by the Lowy Institute, which said the boom only contributed 3 per cent to GDP.

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Building approvals tumble 11%
NOVEMBER 03, 2014 1:00PM

Building approvals plunged in September, falling well short of expectations, official data shows.

The Australian Bureau of Statistics data showed the number of buildings approved fell a seasonally adjusted 11 per cent to 15,004 in the month.

That compares to 16,810 approvals in August, seasonally adjusted.

Economists surveyed by Bloomberg expected a 1 per cent fall in building approvals during the month.

Over the 12 months to August, building approvals were down 13.4 per cent, the Australian Bureau of Statistics said.

Approvals for private sector houses fell 2.3 per cent in the month, while private sector dwellings excluding houses, which includes apartment blocks and townhouses, tumbled 21.9 per cent in seasonally adjusted terms.

On the plus side, most of the fall came from the high-density dwelling category, which is typically volatile and not as important to the economy as stand-alone houses, JP Morgan economist Tom Kennedy said.

"It's a lot weaker than we had expected but if you're looking for the good news, it's that the bulk of the weakness was in the high-density component," Mr Kennedy said.

"That category is often volatile and is prone to having large downturns and large spikes.

"We think it's more or less an aberration and we think we'll see it bounce back in the next few months.

"It's not a good number but it's probably not as alarming as the headline would suggest."

Mr Kennedy said low interest rates and the booming property market should keep building activity strong going forward.

Local councils approved the construction of 15,004 new homes in September, according to the Australian Bureau of Statistics figures on Monday.

CommSec chief economist Craig James believes the housing market is stabilising after a series of strong results.

"Approvals have flattened out at these sorts of levels and they're relatively high levels," he said.

"We're not seeing any signs of oversupply, which would be the case if approvals kept on going up."

Mr James said it's too early to tell what the stabilisation in building approvals will have on house prices, which rose by 10 per cent in 2013/14.

"We'll have to wait and see when the housing supply ends up coming onto the market, there can be a degree of lumpiness that goes with these sorts of things," he said.

"I think the fact that we're seeing a flattening out of approvals, rather than going through the roof or going through the floor, is encouraging."

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Business upbeat on 2015: D&B
NOVEMBER 04, 2014 1:15AM

Businesses think their luck is set to change in 2015, with many gearing up for bumper profits and planning to hire more staff.

An increasing number of businesses expect to lift their sales and profits in the first three months of the new year, according to the latest Dun & Bradstreet business expectations survey.

More than 50 per cent of businesses expect to increase sales in 2015, after actual sales ticked up in the September quarter.

Expectations for higher earnings lifted to a 10-year high.

"The view from the business sector is very positive, with the data on sales and profits suggesting a period of stronger economic growth into the new year," D&B economic adviser Stephen Koukoulas said.

The sales outlook was strongest for the wholesale and retail sectors, where 60 per cent of businesses expect increased trade.

The finance, insurance and real estate sector anticipate the biggest jump in profits.

Meanwhile, 31 per cent of businesses plan to raise their prices.

One in four businesses expect to hire staff in the March quarter and employment expectations are even better among construction businesses, with one in three intending to hire.

"The slow but steady rise in expected employment and capital expenditure readings is encouraging," Mr Koukoulas said.

"These are the components of the business expectations survey that need to keep moving higher if we are to be confident that the economy is moving onto a stronger path."

D&B chief executive Gareth Jones said business optimism should continue into 2015, but its survival was reliant on consumer confidence.

"Although still below trend, D&B is forecasting a lift in Australia's gross domestic product growth from 2.2 per cent to 2.5 per cent in 2015, while a more accommodating currency level and a stronger US economy will support business optimism," he said.

"Consumer confidence, however, appears to be the missing piece in the recovery puzzle and one with the potential to derail the business sector's capacity to grow and drive a new phase in the economy's development."

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RBA leaves cash rate unchanged
NOVEMBER 04, 2014 3:45PM

The Reserve Bank of Australia has held the official cash rate at its record low for the 15th consecutive month, and the third straight Melbourne Cup day, expecting below-trend economic growth for the next several quarters

In a statement accompanying the conclusion of the RBA's November board meeting, governor Glenn Stevens confirmed the cash rate remained unchanged at 2.5 per cent, as had been widely expected.

The Australian dollar surged on the news, jumping more than a quarter of a dollar in half an hour, from US86.97c at 2.25pm (AEDT) to US87.28 cents at 3pm.

Mr Stevens said global growth is continuing at a moderate pace, but said Australian economic growth would be "a little below trend for the next several quarters".

It will probably be some time yet before unemployment declines consistently, keeping wages and inflation low, Mr Stevens said.

“Growth in wages is expected to remain relatively modest over the period ahead, which should keep inflation consistent with the target even with lower levels of the exchange rate.”

"Commodity prices may be persistently high but the resources important to Australia’s economy have declined further in recent months," said Mr Stevens.

But China’s weakening property market presented a near-term challenge for the local economy, he said.

Mr Stevens also said current low rates were improving competition in the lending market, with banks competing for lower rates. But while noting that dwelling prices had continued to rise, he declined to pass judgement on those rises.

“Credit growth is moderate overall, but with a further pick-up in recent months in lending to investors in housing assets,” said Mr Stevens in a statement.

“Investors continue to look for higher returns in response to low rates on safe instruments. Dwelling prices have continued to rise.”

Last week the RP Data CoreLogic home value index showed housing prices rose strongly in October.

In the first 29 days of October, prices in the mainland state capitals were up by an average of 1.2 per cent, after a tiny rise of just 0.1 per cent in September.

CommSec economist Savanth Sebastian said the RBA's November statement appeared to be a carbon copy of October's, indicating interest rates would be staying put for a while.

"What it does highlight is that the Reserve Bank is comfortable on the interest rate sidelines and doesn't believe it needs to let the market know of any significant changes to its views on the economy," Mr Sebastian said.

He said the RBA appeared to remain uncomfortable with the level of the Australian dollar.

"The Reserve Bank seems more comfortable with the currency being in the low 80s (US cents) than the high 80s and I think that's something they will continue to discuss in commentary," he said.

"I think one thing they'll continue to highlight is that it is hampering the rebalancing efforts across the economy.

"There's not much they can do to push down the currency but, certainly, they can continue to jawbone and talk it down."

The rate has remained unchanged since August 2013, but an increase is expected to come some time next year, with 12 of 14 economists surveyed by AAP saying there will be a rate hike in 2015.

St George senior economist Hans Kunnen said the RBA's thinking had not appeared to change in the past month.

"It doesn't change our view that a rate rise will occur sometime around the middle of next year," he said.

Mr Kunnen said he was not surprised the RBA still considers the local exchange rate is too high, despite falling seven US cents since early July.

"I think for them to change their statement the Australian dollar has got to go below 85 US cents," he said.

The RBA moved the cash rate on five out of six of its November board meetings up to 2011, but has not moved on Melbourne Cup day since.