Monthly Archives: July 2013

Kevin or Tony, business grinds on regardless

At about this point before every federal election, someone comes out and complain that political uncertainty is undermining business confidence and hurting investment.

True to form, business leaders were reported by The Australian earlier this week crying that doubts over when the election would be held were “sabotaging jobs and investment”.

We are led to believe that right now across the country, company boards, HR managers and purchasing departments are in a fit of angst about the current state of political flux, delaying crucial hiring and investment decisions as they wait on the Prime Minister to make the short drive to Government House to call the nation to the polls.

If this is the case, it must be an excruciating time for job seekers, merchant bankers, car salesmen and just about anyone else with something to sell.

It would mean that every three years or so – whenever an election looms – economic activity is brought to a virtual standstill as the nation awaits the verdict.

Problem is that, as with much received wisdom, it doesn’t stand up to much scrutiny.

Even a cursory inspection of official investment and employment figures suggests little correlation between election timing and swings in activity.

For instance, in the months leading up to the November 2001 election, private capital expenditure was regaining its momentum after having been savaged by the tech wreck. By the end of the year it had reached annual growth rate of almost 5 per cent – a 10 percentage point turnaround from the March quarter.

And again, in 2004, capex growth slowed in the three months to June to an annual rate of 2.5 per cent before accelerating sharply in the second half of the year to reach above 12 per cent in the December quarter – right when the election was held.

Of course, it has not all been one-way traffic.

Business investment was on a prolonged slide in the months leading up to the March 1996 election, when the Keating Government was dumped in a landslide.

But even here, other factors seemed to be at play.

Quarterly investment growth actually bottomed out the previous June (when it virtually stalled), and strengthened in the six months leading into the election. Maybe it was just that business was confident a change of government was on the cards.

The labour market similarly provides little support for the theory.

Just take these two examples.

In lead-up to, and aftermath of, the fractious August 2010 election, uncertainty about who would form government, and on what terms, was at an all-time high.

But throughout this extremely unsettled period, covering March to October, an extra 180,000 jobs were created, and total employment grew 1.6 per cent.

In 2007, the unemployment rate hovered at or below 4.3 per cent for the six months leading up to the November election, and rose only marginally to 4.5 per cent at election time before quickly reverting to 4.3 per cent the following month.

This is not to say that elections and the prospect of a change of government have no effect on businesses and the investment and hiring decisions they make.

Obviously, if the Federal Government is one of your important customers or a major employer in your area, you could well have a lot riding on the outcome of the poll (though neither side looks likely to unshackle Commonwealth spending any time soon).

But equally obviously, for most employers and investors the election and a possible change of government is only one of a number of considerations, and probably not a major one.

In the ebb and flow of domestic and international commerce, whether it is Kevin or Tony is ultimately neither here nor there – despite what people may claim.

 

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Yes, you heard it right: RBA says embrace risk

It is not often that you hear a central banker urge people to take on risk.

But that was the unexpected pitch from Reserve Bank of Australia Governor Glenn Stevens yesterday as he pondered where growth would come from now that the mining investment boom has all but ended.

In an intriguing passage in his speech to the Anika Foundation in Sydney, Stevens made it clear that nervous savers were in the policy sights of the central bank.

He said that, in lowering interest rates, it had been the RBA’s intention to prod nervous savers into backing out of increasingly expensive safe havens and instead start searching for growth.

As the Governor put it, “One of the things we have been watching for as we have been reducing interest rates has been an indication of savers shifting portfolios towards some of the slightly more risky asset classes, as that is one of the expected and intended effects of monetary policy easing”.

So there you have it, an endorsement from the RBA to take on more risk.

Australia’s central bank, like many others around the world, has done much of the policy work to support growth as governments have concentrated on budget repair and businesses have shied away from debt.

In comments that have imparted fresh momentum to rate cut speculation, Stevens said there was no “serious impediment” to easing monetary policy from its already “very accommodative” setting of 2.75 per cent.

Following his remarks, markets put the odds of a cash rate cut to 2.5 per cent when the RBA Board meets next Tuesday at 94 per cent.

But by his own admission, the Governor is unsure this will be enough to bring about a vital turnaround in confidence.

“It is somewhat concerning that the business community’s confidence has been quite subdued in recent times,” Stevens said. “It would be good if there was a bit more confidence in the business community about the future. Unfortunately…there’s no such thing as a ‘confidence policy lever’.”

The dour mood of business has meant investment in the non-mining sector remains soft, raising the prospect that economic activity – already below average – will slip even lower as the investment phase of the mining boom peters out.

It has also meant that funds that might otherwise go into productive investments have instead been locked up in conservative low-growth but relatively secure assets.

As Stevens said, this has come at a cost to both investors and the economy: “With many investors wanting safety, the price of safety has risen”.

Flagging that more rate cuts may be on the cards, he warned the price would probably have to rise even higher to encourage more adventurous use of funds.

“It [the price] has to rise by enough to prompt at least some people to start to shift their portfolios in the direction of taking some more risk – by holding equities, physical assets and so on, though obviously we don’t want too much risk-taking,” he said.

When even a central banker is urging investors to take a few more chances, you know the flight to security has gone too far.

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Low inflation gives room for rate cut, but no trigger

The Reserve Bank of Australia has ample room to cut interest rates if needed following evidence that inflation was muted in the June quarter, but an August rate cut remains unlikely.

While the central bank appears in no rush to ease monetary policy from its already very-low 2.75 per cent, confirmation that headline inflation grew by just 0.4 per cent in the June quarter, pushing annual growth down by 0.1 of a percentage point to 2.4 per cent, suggests it could cut the cash rate further without immediately feeding a dangerous build-up in inflation.

But the Reserve Bank is likely to keep a wary eye on underlying price pressures, particularly as the weaker dollar means the cost of imports is set to grow more sharply.

Official figures show underlying inflation grew by 0.6 per cent in the June quarter, holding the annual rate steady at 2.4 per cent – just below the middle of the central bank’s 2 to 3 per cent target band.

The most significant price increases in the quarter were for hospitals and medical services (up 3.4 per cent), tobacco (3 per cent), furniture (4.8 per cent) and rents (1.1 per cent).

These were largely offset by falls in the cost of domestic tourism (down 4 per cent) and cheaper fuel (down 3 per cent).

There is nothing in the result that will surprise the RBA, which has said it expects inflation to remain “consistent with the target” for the foreseeable future.

The central bank is likely to closely monitor the evolution of inflation pressures from overseas following the rapid depreciation of the dollar since April.

This effect is yet to show up consistently in the official inflation numbers.

The average price of tradeable goods and services – which comprise about 40 per cent of the consumer price index – rose by just 0.3 per cent in the June quarter, while average inflation among non-tradeable products was 0.5 per cent, mainly due to the pick up in housing activity.

The extent to which the high dollar and fierce international competition has helped hold inflation down was underlined by figures showing tradeables inflation fell 0.7 per cent in the 12 months to June, compared with a 4.3 per cent rise in non-tradeable prices.

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Forget business gloom, ABS revisions suggest housing on the rise

Hopes for an August interest rate cut look increasingly precarious.

Earlier in the week, the Minutes of the Reserve Bank of Australia Board’s July 2 showed the central bank was happy with its current policy settings, and gave no hint of a immediate desire to ease monetary policy further.

In fact, the RBA wants to see the effects of recent rate cuts – which it said were only starting to feed through the economy – before deciding whether more rate relief is needed.

Notwithstanding evidence of weak conditions for many businesses and a 5.5 per cent drop in housing starts early this year, there appears little need for the central bank to change its view.

The results of the National Australia Bank’s quarterly business survey show that business conditions and confidence declined in the June quarter.

This is not really surprising.

As the RBA has flagged, and as NAB Group Chief Economist Alan Oster observes, there is little sign yet that record low interest rates and the tumbling exchange rate are supporting activity.

With these positives yet to make themselves felt, there is little so far to offset the negative effects of a sharp slowdown in mining investment, soft domestic demand growth, rising unemployment and political uncertainty.

Reflecting this environment, businesses surveyed by NAB said a lack of demand was the biggest drag on their profitability – much more so than interest rates, capital and labour.

Underlining the weakness of demand, for the first time in its history the NAB survey found producer prices fell in the June quarter, by 0.2 per cent.

It means input costs are well contained, but so is pricing power.

On the positive side, there has been an improvement in investment intentions in the non-mining sector, though Oster warns it is unlikely to be sufficient to fully offset the slump in mining investment.

None of these developments would particularly surprise the RBA.

But what is a surprise is the admission by the Australian Bureau of Statistics that it has badly underestimated the recovery in housing.

In its Building Activity release on 17 July, it admitted that it had had to make “quite significant” revisions to building approvals data in recent quarters following a major internal audit of figures going back to late 2000.

To give some idea of the scale of the official statistician’s miscalculation, estimates of the total value of building activity in the December quarter 2012 have been revised up by $582.1 million (2.8 per cent), and the estimate of total value of work commenced in the same quarter has jumped almost 9 per cent higher to $1.79 billion. The number of dwelling commencements have been raised 8.4 per cent to 3326.

These are not small corrections.

These revised figures suggest that, even with the setback to starts recorded in the March quarter, the housing sector is developing momentum.

If data releases in coming weeks bear this out, the chances of a rate cut later this year – forget August – will look increasingly dim.

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No smoking gun for August rate cut

Investors anticipating a cut in Australia’s official cash rate to 2.5 per cent next month look set for disappointment.

The minutes of the Reserve Bank of Australia’s 2 July Board meeting suggest a central bank happy with its current policy settings, rather than itching to provide another dollop of stimulus to the economy.

Speculation about a rate cut took flight last week when official figures showed the unemployment rate edged up to 5.7 per cent in June.

Market expectations of an August rate cut had already been edging higher before the labour market update was released, but the 0.1 percentage point rise in the jobless rate was enough to convince several commentators, and more than a few investors, that the case for further monetary policy easing had been made.

But the RBA Board Minutes released today should give all some pause for thought.

They show that the central bank had anticipated that softness in the labour market could see the unemployment rate move higher.

Looking beyond the monthly volatility in the jobs numbers, the RBA saw that annual employment growth – at a little more than 1 per cent – was not enough to keep the jobless rate down.

It noted that leading indicators pointed to only modest employment growth in coming months, suggesting that the “gradual upward trend” of unemployment observed in the past year was likely to continue.

The Minutes included to other important signals that show the Reserve Bank is still some way from being convinced of the need for a further rate cut.

Yes, domestic economic growth is below average, and yes, the mining investment boom has probably peaked, and yes, consumption growth has been modest, and yes, the outlook for non-mining investment is uncertain.

But the central bank thinks the housing market is gradually building momentum, and that the recent 12 per cent depreciation in the Australian dollar has both helped offset the fall in global commodity prices for Australian miners and given a boost to exporters. Added to this, inflation pressures remain contained and labour costs have actually declined.

All in all, the RBA sees little need for haste in adjusting monetary policy, as the following excerpt from the Minutes attests: “The effects of lower interest rates were apparent across a range of indicators and, given the lags involve din the transmission of monetary policy, this process has further to run.”

The central bank sees the floating exchange rate as doing at least some of the policy work for it. The Minutes said “it was possible that the exchange rate would depreciate further [it has, dipping briefly below US90 cents earlier this week], which would help foster a rebalancing of growth in the economy”.

For the benefit of those not yet convinced that a rate cut is not imminent, the Minutes added “given the exchange rate adjustment that was occurring, and with the substantial degree of monetary policy stimulus already in place, members assessed that the current stance of policy to be appropriate for the time being”.

For those looking for the smoking gun on monetary policy, the unemployment rate is not it, and nor is the drop off in mining industry investment.

What is most likely to make the RBA move again is a sustained relapse in housing activity, a reversal in the US economic recovery or a much harder than expected landing for the Chinese economy.

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Dollar dive staves off rate relief

Expectations that the dollar has further to fall has helped convince the Reserve Bank of Australia to keep interest rates on hold despite concerns about sluggish growth in the economy.

In a widely anticipated decision, the RBA Board has held the cash rate steady at 2.75 per cent for a second consecutive month as it assesses the effect of a 10 per cent slide in the currency against the greenback in the past three months on prospects for growth.

In a bearish assessment on the outlook for the currency following the Board meeting, RBA Governor Glenn Stevens said it was “possible” the dollar had further to fall.

The weaker dollar, which was trading at around US92 cents just before the Board’s decision was announced, is expected to encourage a lift in activity in manufacturing, higher education, tourism and other trade-exposed sectors of the economy.

Mr Stevens said that if it continued to slide, it would “help foster a rebalancing of growth in the economy”.

But the central bank has not ruled out further rate cuts, indicating that the moderate outlook for inflation – which it expects to hold steady at around 2.5 per cent “over the next one to two years” – leaves room to move the cash rate lower.

“The Board judged that the inflation outlook, as currently assessed, may provide some scope for further easing, should that be required to support demand,” Mr Stevens said.

The RBA Board stood by its assessment of a month ago that although the global economy was currently growing at a subdued pace, it was likely to strengthen next year.

Markets have been rattled in the past month by signs of a sustained recovery in the US economy, which has fuelled speculation that the US Federal Reserve may begin winding down its extraordinary stimulus efforts by late this year.

Though the latest US growth figures were revised down last week, there is mounting confidence that a sustained recovery in the world’s largest economy is underway.

But sentiment has been hurt by evidence of a developing credit squeeze in the Chinese economy as authorities act to curb lending and encourage greater demand-driven rather than investment-driven growth.

Closer to home, the RBA is conscious of the difficult transition underway in the Australian economy as the support for growth from massive mining investment tapers off, while activity in other sectors is yet to pick up, leaving the country vulnerable to downturn.

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