Monthly Archives: January 2014

Solid build up behind job losses

Though the loss of more than 31,000 full-time jobs in December 2013 has, not surprisingly, grabbed most attention, the Reserve Bank of Australia is possibly more interested in another set of numbers that came out today.

In a sign that low interest rates are having the desired effect, building activity is strengthening, improving 1.6 per cent in the September 2013 quarter to be up 5.4 per cent from a year earlier, according to the Australian Bureau of Statistics.

In the residential sector, new houses accounted for the majority of improvement – activity there was up more than 5 per cent from the September quarter 2012. This is on top of a significant 3 per cent upward revision in ABS estimates of dwelling commencements in the June 2013 quarter.

The improvement has also been reflected in measures of the value of all building work done, which rose above $21 billion in the September quarter for the first time in about two years.

The activity figures match RBA lending data, which show housing credit grew by 5 per cent in the year to last October.

Taken together, the results are adding to the pretty strong signal to the central bank that, notwithstanding December’s weak jobs numbers, it does not need to cut interest rates any further.

Before the release of the labour force data, markets had priced in a minor 7 per cent chance that the official cash rate would be lowered to 2.25 per cent at the RBA Board’s 4 February meeting.

Knee-jerk reaction might have pushed those odds a little higher since but it seems unlikely the unemployment reading will have unsettled the RBA, which anticipated the jobs market would soften through much of the coming year.

Instead, the on-going recovery in building work will have it pondering how much longer it should hold interest rates down at current levels.

Though inflation remains subdued, and talk of housing bubbles is (once again) exceedingly premature, household spending is clearly gathering some momentum. Retail sales are up, as are building approvals and home construction. Sure, job insecurity will be a not-insignificant handbrake on consumption.

But in the push and pull of economic forces, growth seems to be gaining ground, and the RBA is likely to view the 2.5 per cent cash rate as increasingly inappropriate.




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Aussie retailers barely in the online shopping game

There’s a bit of a reality check for Australian retailers in today’s retail numbers regarding how well they are doing tapping into the burgeoning online shopping market.

The bottom line message is, not well.

For the first time, the Australian Bureau of Statistics has released a time series of estimates of online retail turnover in Australia, and they show that domestic online shopping accounted for no more than 1.9 per cent of total retail sales through most of 2013.

More alarmingly, given strong international growth in online shopping, among Australian retailers online purchases as a proportion of overall sales barely budged over the period. If you are looking for strong growth, it’s not here.

This included both businesses set up purely as online traders, and those who operate an online shopping site as an adjunct to bricks and mortar outlets.

Of course, the main online competitive threat for many retailers comes from offshore, and unfortunately these numbers shed no light on that.

But as a barometer for how well local retailers are coping in meeting this threat, the figures are not particularly encouraging, especially when anecdotal evidence and inferences from things like parcel volumes suggest online shopping overall is booming.

Unsurprisingly, given this is a first off attempt, these numbers – which cover the period from March to September last year – come with plenty of caveats.

Firstly, they are only in original terms – the ABS says it will look to publish seasonally adjusted and trend estimates “in the future”.

Secondly, there will inevitably be revisions and changes to methodology, questions about sampling variability and so on.

But as a wake up call for local retailers about their lack of penetration into the online shopping market, they should resound through the industry.


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Is there a case for a February interest rate hike?

The rate hike hares are running following evidence that shoppers are spending more freely and building approvals are back to levels last seen almost three years ago.

In a sign that the stimulus from low interest rates is sustaining an improvement in consumer outlook despite the soft employment market and federal budget gloom, retail sales rose 0.7 per cent in November to be up 4.6 per cent from a year earlier, while building approvals remained at their healthiest level in years, despite a small retreat from the previous two months.

The solid readings have led at least one prominent economist to predict the Reserve Bank of Australia will soon have to begin raising interest rates in order to ward off the risk of a surge in inflation.

Market Economics managing director Stephen Koukoulas said today the economy “is on fire”, and that the Reserve Bank Board should lift its cash rate when it returns for its first monetary policy meeting of the year on February 4.

The latest readings on the economy follow the release of figures last week showing the nation’s trade deficit narrowed significantly in the second half of 2013, a trend that is expected to continue as the completion of major resource infrastructure projects boosts the nation’s export capacity.

After reaching above $1.5 billion in mid-2013, the deficit had shrunk to little more than $110 million in November, and anecdotal evidence indicates there was strong growth in iron ore export volumes last month.

Adding to the picture, a Dun & Bradstreet survey released earlier this week indicated that business is becoming increasingly upbeat about its investment and employment intentions.

But worries about the health of the jobs market remain.

According to the Australian Bureau of Statistics, monthly job vacancies have been in a sustained decline since reaching a peak of almost 190,000 in early 2011. In November last year, the ABS reported, there were barely 140,000.

In its mid-year update on the economy, Treasury was downbeat on the labour market, predicting the jobless rate would rise to 6.25 per cent next financial year as the economy grew at below-trend rate.

But, as Kouloulas points out, the jobs market is a lagging indicator of economic activity, and the latest economic data suggest Treasury may have been too pessimistic.

For instance, between August and December it cut forecast dwelling investment growth from 5 to 3 per cent, though as it itself admitted, “finance commitments for new dwellings are now 12.4 per cent higher than a year ago and building approvals have improved noticeably from their trough in early 2012. Higher house prices could initiate a stronger investment response”.

The risk for the RBA is that, if it misreads the situation, a rate hike in the next month or so might puncture nascent optimism and slow or stall (at least temporarily) the recovery in non-mining sectors of the economy.

The risk is heightened by the Federal Government’s tub-thumping on the state of the Commonwealth Budget and looming threat of significant cuts in public sector spending.

In addition, raising rates could help reinflate the Australian dollar, something the RBA would be keen to avoid (one of this blog’s correspondents, @MrMacroMan, said that an RBA official speaking in New York overnight was “very clear on AUD risk and rates on hold”).

Yet, if analysts like Koukoulas are correct and the economy is taking off, an official interest rate of 2.5 per cent would obviously be inappropriate, and could sow the seeds of dangerous price pressures down the track.

As RBA Governor Glenn Stevens might say, the decision may come down to which is the path of last regret.

Fortunately for it, more evidence about the strength of activity is due to be released before the 4 February meeting, including finance and employment figures, as well as construction activity numbers.

In the meantime, markets are likely to be busily recalculating the odds of a rate move at next month’s meeting.

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Big oil shows up Abbott on climate change

It used to be that citizens would look to governments to develop plans for the long term.

But on the issue of climate change the world has entered a bizarre parallel universe where it is the private sector – specifically major multinational corporations – that is leading the way.

Some of the world’s biggest energy companies are proving to be streets ahead of most governments when it comes to preparing for what they see as the inevitable need to do something about carbon dioxide emissions.

In a development that sits very uncomfortably with the second-rate thinking of tub-thumpers like Alan Jones and Andrew Bolt, and the craven and populist agendas of politicians like Tony Abbott, major corporations including Exxon Mobil, BP and Shell are developing their operations in the expectation of some form of carbon tax at either an international, regional or national level.

An illuminating article in the December 14 edition of The Economist reported that many major multinational firms have adopted “internal carbon prices” – attaching a cost to emissions of carbon dioxide produced in their operations – to help them prepare for what they see the inevitability of a national and international carbon pricing regimes.

This is not limited to small, green-hued firms operating at the fringes of the global economy: massive operators including Exxon Mobil, BP, Shell, Total, Google, Disney, ConocoPhillips and Microsoft have all adopted internal carbon prices.

And they are not being Mickey Mouse in the prices they are setting. Exxon Mobil has put its internal carbon price at $US60 a tonne, BP and Shell at $US40, while Google has their’s at around $US12 a tonne and Microsoft $US6 to 7 a tonne.

For these firms, the price signal serves two purposes. It helps them quantify their risk, and spurs them to develop ways to mitigate that risk by reducing, or at least slowing the growth of, CO2 emissions.

The adoption of a carbon price by the Labor Government was essentially serving the same purpose – preparing the country to be competitive and ahead of the game when carbon pricing regimes begin to operate internationally or in trade between major regions.

Instead, by dumping what had been set up, the Abbott Government is condemning Australia to once again be trying to catch up as the world moves on, to be a policy taker, rather than policy maker.

Thanks Tony, thanks Andrew.



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