Population growth slowing at end of resources boom
THE AUSTRALIAN JUNE 26, 2015 12:00AM
David Uren
Economics Editor
Canberra
Population growth is slowing. Source: News Corp Australia
Big falls in migration to the resource states and increases in household wealth are helping the economy to adjust to the end of the resources boom.
Increasing wealth is allowing consumers to keep spending despite low levels of wage growth, while Australia’s skilled migration program, including the temporary work visas, has given flexibility to the labour force.
A sharp fall in demand for labour in the resource states has been absorbed by falling migration without pushing up unemployment.
Australian Bureau of Statistics reports yesterday on population growth and household finances helped explain how the economy was achieving healthy growth despite plunging business investment and export prices.
Net migration into Western Australia has plunged by two-thirds in just the past two years, dropping from 56,300 in 2012 to 18,900 last year. Migration to Queensland has also dropped heavily, from 43,600 to 24,200.
But migration to Victoria and NSW — where the economies remain firm — has continued at elevated levels, with the 69,900 migrants to NSW last year the highest in five years.
Australian National University demographer Peter McDonald said that, ideally, a migration program responds to swings in labour demand. “These numbers suggest it is doing just that,’’ Professor McDonald said.
The ABS job vacancies survey, which is considered the most reliable measure of labour demand, shows continued strengthening from the weakness over much of 2013-14.
The number of job vacancies across the country is up 6.6 per cent from a year ago, with most of that growth in Victoria and NSW, while the number of vacancies in Western Australia has dropped.
The ABS analysis of household finances shows wealth rose 9.3 per cent to $8.1 trillion over the year to March, far outstripping the 2.5 per cent rise in disposable income which, apart from the depths of the global financial crisis, was the lowest in 13 years. Per-capita wealth reached a record $340,900.
Housing and property account for almost two-thirds of wealth and rose in value by 8.5 per cent to $5.2 trillion. Superannuation holdings rose 12.5 per cent to $2.3 trillion while the value of other shares rose 11.3 per cent to $685 billion. Bank deposits were up 8.8 per cent to $915bn and debts rose 7.5 per cent to $1.9 trillion.
The fall in migration to the resource states is contributing to lower overall population growth, with the 330,000 rise over 2014 down 17.5 per cent from the recent peak of 400,000 in 2012.
In 2008, before the impact of the financial crisis, population had soared by 460,000 or 2.2 per cent.
Growth is down to 1.4 per cent in the latest year, although this is still among the highest in the advanced world.
Net overseas migration has fallen from 237,000 to 184,000 in two years.
The population report also shows the birthrate is falling. However, the ABS cautions that problems with a new database at the NSW births and deaths registry makes this unreliable.
Surge in Chinese tourists lifts spending by 19pc
Jamie Freed
427 words
22 Jun 2015
The Australian Financial Review
AFNR
English
Copyright 2015. Fairfax Media Management Pty Limited.
Foreign visitor spending rose by 7 per cent to $31.1 billion on the back of another big increase in the number of Chinese tourists and a strong performance from the United States.
The number of arrivals in Australia rose by 8 per cent to a record 6.4 million last year, according to Tourism Research Australia's International Visitor Survey for the year ended in December.
There was a 10 per cent rise in the number of tourists visiting friends and relatives, outstripping the 8 per cent rise in the holiday market and a 3 per cent rise in the business market.
Visitor numbers for China - the second largest market for arrivals after New Zealand - rose by 18 per cent to 784,000. Spending by Chinese visitors rose by 19 per cent to $5.7 billion, reaffirming its place as the most lucrative market and accounting for 18 per cent of all international visitor spending.
TRA assistant general manager Spiro Kavadias said the outlook for inbound travel remained positive this year as a result of the current record performance, the lower Australian dollar, proximity to Asian growth markets and continued economic recovery in Western markets.
The only big market to report a decline in numbers last year was Britain with a 1 per cent fall in arrivals, but that followed a particularly strong 2013 when the Ashes cricket series was held in Australia.
The US market, Australia's fourth-largest by arrivals, grew by 11 per cent to 523,000 arrivals and spending rose by 9 per cent to $2.8 billion.
Tourism Australia managing director John O'Sullivan said the data reinforced just how well the tourism industry was performing.
"The latest figures round off what was a record-breaking 2014, both in terms of international arrivals and the money they inject into our visitor economy," he said.
"It's important now that we take forward this momentum into the rest of 2015, and beyond to 2020."
Mr Kavadias said the tourism industry was in a "good position" to reach its goal of $115 billion to $140 billion of overnight tourism spending by 2020, which includes the much larger domestic market as well as spending by international visitors.
NSW Minister for Trade, Tourism and Major Events Stuart Ayres said the number of international visitors to Sydney had reached 3 million for the first time last year, while in regional NSW there was a 6.9 per cent rise in international visitors to 635,000.
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Document AFNR000020150621eb6m0001b
Oil and gas set to lead growth in 2015/16
AAP JUNE 30, 2015 3:57PM
A woodside oil rig. The sector is tipped for strong revenue growth in 2015/16. Source: News Corp Australia
Oil and gas, childcare services and beef farming are tipped to be Australia’s leading growth sectors in 2015/16, according to business information analysts IBISWorld.
But while they surge ahead, credit unions, banks and ceramic product makers are expected to battle falling revenues.
Growing demand from Asian markets, especially Japan, is expected to be a big revenue driver for Australia’s liquefied natural gas (LNG) sector.
Japanese energy suppliers converted to gas-fired plants after the Fukushima nuclear disaster in 2011.
IBISWorld says Australian LNG producers are well positioned to meet the soaring demand as production and export capabilities rise.
Natural gas projects off the coast of Western Australia — Gorgon, Wheatstone and Prelude — and Queensland’s Gladstone LNG project are driving production growth.
“In conjunction with growing production, selling LNG at global prices, rather than the cheaper domestic prices, will provide an additional boost to industry,” IBISWorld senior industry analyst Ryan Lin said.
Elsewhere, childcare is expected to benefit from more women joining the workforce and strong government support for care providers.
An increase in dual-income families is also expected to result in more children being enrolled in childcare.
In the agriculture sector, strong overseas demand for Australian beef and higher prices should help boost revenues and offset the impact of a forecast decline in live exports to Indonesia as it imposes stricter import quotas.
On the flip side, ceramic product makers are expected to lead the industries experiencing revenue falls.
GWA Group, formerly the industry’s largest player, has moved its manufacturing operations offshore, and no Australian manufacturers are expected to fill the gap.
GWA sells the Caroma and Dorf brands of sanitary and bathroom ware.
“While GWA Group’s shift to offshore manufacturing is the most significant factor in the industry’s decline, sales of locally manufactured refractory and specialist ceramic products are also expected to take a hit in 2015/16, as demand from the iron smelting and steel manufacturing industry continues to dwindle,” Mr Lin said.
Meanwhile, historically low interest rates are expected to result in significantly lower revenues for credit unions, and national and regional commercial banks.
Revenue generated by credit unions and banks depends on the size of their lending books and the interest they receive from those loans.
Although the credit unions and commercial banks have increased their activity in the residential property market, the lower interest from loans could eat into revenue.
REVENUE WINNERS TIPPED FOR 2015/16
* Oil and gas extraction, revenue to grow by 12.8pc
* Child care services, revenue growth of 12.2pc
* Beef cattle farming, revenue growth of 11pc
* Funds management, revenue growth of 10.6pc
* Data centres, revenue growth of 9.9pc
REVENUE LOSERS TIPPED FOR 2015/16
* Ceramic product manufacturing, revenue to fall 11.6pc
* Credit unions, revenue to fall 7.8pc
* Commercial banks, revenue to fall 6.9pc
* Site preparation services, revenue to fall 6.9pc
* Machinery and scaffolding rental, revenue to fall 6.6pc
AAP
Mining export forecasts: $17.4bn slashed
THE AUSTRALIAN JULY 01, 2015 12:00AM
ambers
Resources Reporter
Melbourne
The Industry Department has slashed forecasts for mining and energy exports in 2014-15 and this financial year by a further $17.4 billion as price and production expectations for Australia’s two biggest exports, iron ore and coking coal, continue to slide.
The cuts have been made from forecasts lodged just three months ago and include expectations that Chinese steel production, which as recently as March had been forecast to grow, instead will contract this year and next.
The new forecasts, in last month’s Resources and Energy Quarterly report from the Department of Industry and Science, show how the outlook for Australia’s mining commodities has worsened in the past three months as China continues to slow.
“Global commodity prices are clearly in a downturn and many of the factors that supported the ‘supercycle’ that commenced in the 21st century have now reversed,” the department’s chief economist, Mark Cully, said.
“Strong resources-sector investment has resulted in a surplus of both mining and refining capacity, consumption growth has moderated to lower levels and the US monetary policies that affected US-dollar-dominated prices are starting to shift.”
Over 2014-15 and 2015-16, Australian mining and energy exports are forecast to be worth $351.5bn, down from March forecasts of $368.9bn. In March last year, the forecast export earnings for those years was $453bn.
“In 2014-15, export earnings from resource and energy commodities are estimated to have declined by 11 per cent to $174bn,” the report said.
“This fall in export revenue is partly due to a 27 per cent decline in export earnings from iron ore, a 7 per cent decline in metallurgical (or coking) coal and a 6 per cent decline in thermal coal export values.”
In March, when the year was three-quarters through, the 2014-15 forecast for mining and energy revenue was $179bn. That an extra $5bn was knocked off expectations in the last three months of the financial year illustrates how the situation deteriorated in that time.
A big change in the June report was a reversal of expectations that Chinese production of steel, which requires both iron ore and coking coal, would grow this calendar year and next. “China’s steel production is forecast to contract in 2015 and 2016 as the seaborne supply of iron ore increases,” the report said.
In March, China’s steel production was expected to increase from 823 million tonnes last year to 843 million next year. Now it is expected to fall to 802 million in 2016. Australian resource exports are expected to recover to $177bn this financial year as more export revenue from three big liquefied natural gas plants being built at Gladstone comes in. However, this is still $12bn short of the amount that was being factored in just three months ago.
The biggest forecast changes have come in iron ore, the nation’s biggest export, where $9.9bn has been wiped from export earnings forecasts over the past financial year and in 2015-16.
This has come as price forecasts this year dropped 10 per cent to $US54.4 a tonne and 56 million tonnes of forecast volumes were removed as some miners close operations and curtail or delay expansion plans.
Manufacturing activity slumps in June
MICHAEL RODDAN BUSINESS SPECTATOR JULY 01, 2015 9:38AM
Carmaking closures are having a growing impact on downstream demand. Source: Supplied
Australia’s manufacturing sector contracted sharply in June, after expanding for the first time in six months in May.
The Australian Industry Group’s performance of manufacturing index (PMI) dropped 8.1 points to 44.2 in June, the lowest reading since July 2013.
The index now sits well below 50 points, the level which separates expansion from contraction.
Ai Group said manufacturing sales declined for a 13th straight month, signalling continued weakness in local demand.
“Respondents indicated that local demand remained weak in June, despite increased residential construction activity and very low interest rates,” the group said.
AiG said the ongoing closure of the automotive industry was biting on downstream demand.
“Subdued consumer and business confidence, further declines in mining and other business investment in machinery and equipment, and a slow economic outlook, also continue to weigh on local demand.”
In some positive news, manufacturing stock levels were broadly stable over the past two months, and exports expanded for a second consecutive month, mainly in the food and beverage sector, as the lower dollar continued to support export growth.
The Australian dollar exchange rate has been on a steady decline against its US counterpart, losing around US20c since the middle of last year. The currency has recently traded in a range between US75c and US80c.
The food, beverages and tobacco sub-sector has been the strongest, and had the most consistent growth trend, of all sub-sectors since 2013.
The June reading follows a surge of activity in May, when the index lifted 4.3 points to 52.3, as the lower Australian dollar supported a flurry of exports.
May’s result was the first time the figure crept above 50 after five months of sluggish activity.
Business Spectator
http://www.smh.com.au/business/the-econo...i44nu.html
Australia's economy in 'vicious circle', with sluggish growth set to continue
Date
July 3, 2015 - 1:17PM
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Vanessa Desloires
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Economists expect the cash rate to stay low as the economy struggles to grow.
Economists expect the cash rate to stay low as the economy struggles to grow. Photo: Bloomberg
The Australian economy will continue its listless growth in the new financial year as the transition away from mining investment drags its feet, top Australian economists say. But there are signs of life.
St George chief economist Hans Kunnen said economic growth was "lacklustre" as the transistion from mining to non-mining investment-led growth proved to be a slow process.
But he sees bright spots in the economy including the booming housing construction sector, which was benefiting from the nation's record low interest rates, Mr Kunnen said.
Economist Michael Blythe says the low interest rates might be counterproductive to capital investment.
Economist Michael Blythe says the low interest rates might be counterproductive to capital investment. Photo: Lisa Maree Williams
"We expect economic growth in 2015 of 2.4 per cent, rising to 2.9 per cent in 2016," he predicted, with boosts coming from the country's rising population and an expected weaker Australian dollar at US73¢ by year's end, which would help save costs and create jobs.
ANZ economist Felicity Emmett was more bearish.
"Despite more stable commodity prices recently, we still think profit growth will be low, government spending soft, and wages growth anaemic as the impact of past commodity price declines [is] still being felt," she said.
Commonwealth Bank chief economist Michael Blythe said Australia needed new sources of income and jobs if the economy was to expand for the 24th year, with one upside being the exports in liquefied natural gas.
"LNG will become our second-biggest export in the coming years. It will make us the biggest exporter of LNG in the world, and when you take those export trends and even at today's low commodity prices it translates to an income boost that's worth about 4 per cent of GDP," he said.
The two interest rate cuts in the first half of this year have kicked along consumer spending and dwelling investment, Mr Kunnen said.
"Despite historically low interest rates, businesses are reluctant to invest and waiting to see a sustained pick-up in demand. The process has become somewhat of a vicious circle, as lacklustre economic growth and slow wages growth are keeping consumer demand in check," he said.
The interest rate cuts haven't had enough time to feed into the economy, and Mr Kunnen said the latest Federal Budget measures supporting small business may be the circuit breaker needed.
Mr Blythe forecast the key cash rate to remain at 2 per cent for an extended period, but noted the cheap rate environment may also be hindering the pace of much-needed capital expenditure.
"As the Reserve Bank lowers cash rates and the banks lower their deposit rates companies are coming under increasing pressure [from shareholders] to pay high dividends," he said.
"The risk is that some of that increase in dividends is being paid for by cutting back capital spending, so rate cuts may in fact not be very helpful at all," he said.
Ms Emmett said high hurdle rates - hurdles posed by the minimum returns needed from investments to make them viable - and the short timeframe in which businesses need to recoup their investments were also weighing on business spending.
"This is despite the sharp fall in interest rates over recent years, and so it is not clear that even looser monetary policy would help stimulate activity," he said.
Jul 7 2015 at 6:37 PM Updated Jul 7 2015 at 8:05 PM
Household living standards headed to 1990s levels, warns Deutsche Bank
Cheap holidays and online shopping are predicted to decline. Julienne Schaer
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by Jacob Greber
Australian's purchasing power will deteriorate rapidly within two years to levels last seen in the 1990s, according to research that one prominent economist says highlights the need for a fresh wave of growth-enhancing policy reform.
The so-called global purchasing power of Australians households will fall to ninth place this year from fifth last year, when only Luxembourg, Norway, Qatar and Switzerland out-ranked Australia.
International Monetary Fund data analysed by Deutsche Bank, measured in terms of per capita gross domestic product in US dollars, shows the days of cheap internet shopping and holidays to Disneyland or New York of the past decade may soon move beyond the reach of many Australians.
In a blunt demonstration of how the Reserve Bank of Australia's strategy to drive down the dollar and the end of the resources boom is hitting living standards, Australia's ranking is predicted to worsen to 17th place within two years, driven by lower income growth from commodities, soft wages and a slide in the dollar to US60¢ by 2017, Deutsche Bank economist Adam Boyton estimates.
The findings are a wake-up call for the Abbott government, which is expected to call an election within the next 12 months, with analysts warning the new reality of a lower dollar will weigh on consumer sentiment, which is already under pressure from political paralysis in Canberra.
Mr Boyton indicated that Australia's ranking may head back to what it was in the 1990s, when it was around 20th but not as bad as the nadir reached in 2001 when it came in at 25th.
The fall in household living standards may add to a growing political debate about Australia's key economic settings. Many economists – led by those at the Reserve Bank of Australia, which is actively seeking to lower the dollar through official interest rate cuts – have welcomed the adjustment of a lower currency as a way of boosting the competitiveness of export sectors such as mining, tourism and education.
Governor Glenn Stevens on Tuesday again called for further falls in the currency, even as it traded late on Tuesday at US74.39¢, a six-year low and more than 30 per cent below its 2011 record of more than US$1.08. The Reserve Bank board on Tuesday kept official interest rates at 2 per cent, the lowest level in history.
Others argue that instead of trying to manage the currency lower – thereby reducing the purchasing power of households further – governments should focus on boosting productivity to ultimately enhance wages and growth.
"Falling purchasing power partly reflects the inevitable end of the mining boom but it also reflects that much of the adjustment in the economy is happening through interest rates and the currency, and not enough through economic reform that could lift productivity, lift wages and support growth in that way," Mr Boyton said.
"What was never explained well to Australians was that when the currency was high and things from online retailers were cheap, and holidays overseas were cheap, that was how everyday Australians – even if they didn't go near the mining sector – got a benefit from the mining boom."
While Mr Boyton said households are wealthier than ever before, their relative global purchasing power headed back to where it was two decades ago, when the economy ground through an agonisingly slow recovery from the early 1990s recession.
"These are the real things that impact the ability of Australians to have higher living standards or take advantage of things beyond our shores," Mr Boyton said.
A spokeswoman for Treasurer Joe Hockey said the government has consistently recognised the need to raise productivity to create new jobs and boost incomes.
Despite the largest fall in the terms of trade in half a century, economic growth remains among the world's fastest, she said.
"That's why this government is focused on improving workforce participation, committing to building productivity enhancing infrastructure, boosting innovation and competitiveness and encouraging the entrepreneurial spirit of Australians including through our $5.5 billion jobs and small business package."
Labor Treasury spokesman Chris Bowen said the Deutsche Bank research was "exactly the reason we need a government with an economic plan for diversified growth.
"The Abbott government hasn't seen an industry it doesn't want to see the back of … we see the Treasurer and Agriculture Minister regularly attacking different sources of foreign investment.
"Labor has already begun to put forward policies to enhance investments and training in STEM, that's the key to developing the businesses and jobs of the future."
RBA steadies market nerves as interest rates hold
THE AUSTRALIAN JULY 08, 2015 12:00AM
David Uren
Economics Editor
Canberra
Opaque RBA holds at 2%
Reserve Bank governor Glenn Stevens has reassured investors that global financial markets remain sound in the face of the turbulence caused by events in Greece and China.
Hopes that the European Union and the Greek government might be able to hammer out a last-minute financial bailout that would keep the country in the eurozone yesterday brought relief to global markets.
And, announcing the RBA board had kept official interest rates steady at a record low 2 per cent, Mr Stevens said that “despite fluctuations in markets associated with the respective developments in China and Greece, long-term borrowing rates for most sovereigns and creditworthy private borrowers remain remarkably low”.
The Australian sharemarket had its biggest one-day jump in five months, the benchmark S&P/ASX 200 index rising 1.9 per cent to close at 5581 points.
Investors were also reassured that falls on the Shanghai market, which has shed 30 per cent in the past fortnight, were contained at 1.4 per cent yesterday, suggesting that government efforts to support share prices might be having some effect.
Mr Stevens provided no indication on the likelihood of further rate cuts, however, financial markets are trading on the basis that the Reserve will be forced to lower rates at least once more before the end of the year.
Mr Stevens said the elevated level of unemployment showed the economy still had spare capacity that justified continued low interest rates.
The Reserve would likely have to see unemployment rising again before cutting again, and Mr Stevens noted yesterday that the jobless rate had remained steady in recent months. Fresh jobs figures will be released tomorrow.
The market reaction to the Greek and Chinese crises is much more muted than was the case in 2012, when Greece last faced the prospect of default.
Bond rates for vulnerable European countries such as Spain, Portugal and Ireland all fell at the opening of trade last night, reflecting greater investor confidence.
Greek Prime Minister Alexis Tsipras was travelling to Brussels last night for talks while a meeting was scheduled with leaders of all 19 eurozone countries.
Commonwealth Bank market strategist Richard Grace said the fact that people were talking provided some reassurance. “My expectation is that they will come to an agreement on a package and that then the European Central Bank will lift emergency liquidity funding for Greek banks, however, this has been turning and changing in unexpected directions so it is hard to be sure,” Mr Grace said.
European officials say that, having rejected their last offer, it is up to Greece to come up with a counter proposal. The ECB has held its maximum funding for Greek banks at €89 billion ($131bn) and yesterday indicated that it would require additional collateral from the banks in return for support. Greek banks are expected to remain closed for most of this week until a deal can be done to secure increased funding.
Mr Grace said foreign exchange markets had retained their confidence in the euro, with strong buying whenever the currency dipped. However, the outlook remains uncertain. The Australian dollar steadied at US74.8c yesterday after falling 2.9 per cent in the past week.
Mr Stevens said yesterday that further depreciation in the currency was “both likely and necessary” given the weakness in commodity prices. Although the currency has fallen below the US75c level he nominated late last year as fair value, commodity prices have fallen heavily since.
Reserve Bank officials have previously argued that the Greek economy is too small to directly affect Australia’s outlook while they believe European authorities have sufficient ability to contain any default.
The major concern from any departure by Greece from the eurozone would be geopolitical, reflecting a possible rapprochement by Greece’s leftwing government with Russia, which could provoke a reaction from the Greek military.
However, the outlook in China is of more immediate economic concern. ANZ China analysts Li-Gang Liu and Raymond Yeung said yesterday that the sharemarket rout was not yet a threat to the Chinese banking system, saying most leveraged investment in the market was from small retail customers.
“There is no evidence banks have widely accepted equity-based assets held by corporates as collateral, suggesting that falling share prices will unlikely result in massive nonperforming loans,” they said, adding that the momentum of economic growth in China was slowing. Barclays chief economist Kieran Davies said the health of the Chinese economy remained a risk for Australia. He noted that China’s steel production had fallen 2 per cent over the past year.
With considerable uncertainty around the outlook for the Chinese property market pointing to uncertainty about the outlook for Australia’s main commodity exports, we think China is a key downside risk to the outlook,” he said.
Mr Stevens indicated that the state of the Sydney property market remained a concern, with prices still rising strongly, although the Australian Prudential Regulation Authority is working to ensure banks do not take excessive risks.
China circles in $1bn Iona gas race as Lloyds eyes Wiggins exit
THE AUSTRALIAN JULY 09, 2015 12:00AM
Bridget Carter
Mergers & Acquisitions Editor
Sydney
Gretchen Friemann
Mergers & Acquisitions Editor
Sydney
China’s sovereign wealth fund, China Investment Corporation, has joined the $1 billion race for Energy Australia’s Iona gas storage plant — a move that will ratchet up the competitive pressure on the leading contender for the asset, APA Group.
News of the Chinese interest comes hot on the heels of revelations in this column that CIC numbers among the favourites for Morgan Stanley’s $8.9bn real estate empire. It also underscores the ballooning offshore appetite for Australia’s relatively high-yielding infrastructure and real estate assets.
According to sources, more than two dozen parties have cast an eye over Iona, which is one of a handful of gas storage plants in the country and was constructed in 2008 to help manage fuel flows through peak and off peak periods.
APA, the country’s biggest gas pipeline owner, is widely viewed as the favourite for the plant.
The company, which has engaged Morgan Stanley as an adviser in this latest acquisition, is in the midst of an aggressive expansion drive that has so far seen it outlay $6bn for BG’s Queensland pipeline, as well as thrust it into negotiations to construct a natural gas pipeline from the Northern Territory to the Eastern states.
Yet in the Lazard run race, APA will face stiff competition from domestic and offshore players.
Brisbane-based QIC is also in the race and has leant on Citi for advice. However some remain sceptical about the depth of its appetite given recent warnings from Paul Costello, the chair of its global infrastructure investment committee, about the dangers of overbidding for assets
Meanwhile, there were gathering expectations yesterday about Lloyd’s imminent exit from the $2.8bn debt stack attached to Queensland’s Wiggins Island Coal Export Terminal. Potential credit funds have been eyeing the $100m-plus loan slice since 2013 when the UK bank signalled it may sell the paper.
The WICET debt is Lloyd’s sole asset left in Australia.
Sources said Deutsche was likely to run an auction for the bank’s loan although some questioned whether an investment bank would be required in this scenario.
Restructuring specialists claimed there is little logic in offloading the paper at a heavily discounted price and argued WICET’s debt stack is not in distress, despite plummeting coal prices, which continue to pile pressure on the asset’s stakeholders.
Confidence hits two-year high but firms reluctant to invest
MICHAEL RODDAN
BUSINESS SPECTATOR
JULY 14, 2015 12:04PM
Business confidence has hit a two-year high, while business conditions are the best in nearly a year, but firms are reluctant to invest, requiring an “extremely high” rate of return compared with current record-low interest rates, according to National Australia Bank.
Business confidence in June hit its highest level since the federal election, with firms’ sentiment now as strong as when the Abbott government first came to power in September 2013.
Meanwhile, business conditions — a measurement of the employment, trading and profit environment — rose to its highest level in nearly a year, according to NAB’s monthly business survey.
NAB’s confidence index rose to 10 points in June, from 8 in May, while conditions rose to 11 points from 6.
While conditions still vary greatly across industries with the services sector continuing to outperform, business confidence is now positive across all industries, except mining, which is neutral.
“Improvements in both confidence and conditions over recent months are starting to suggest a more convincing turnaround in the non-mining sectors is under way,” NAB chief economist Alan Oster said.
Business confidence was boosted by lower interest rates, a lower Australian dollar and a better-received budget, while conditions were now in a “decisively positive” trend with the non-mining industry finally gaining some traction, Mr Oster said.
However, he said the employment environment was a concern, despite NAB lowering its jobless rate peak to 6.25 per cent, while the “bellwether” wholesale industry remained at weak levels.
Mr Oster said he was expecting no further interest rate cuts, after the Reserve Bank trimmed the official cash rate in February and May to the current record low level of 2 per cent.
The NAB survey included a new question to firms on their hurdle rates for investment — the anticipated rate of return they require before committing to investment — which showed the average hurdle rate was 13 per cent.
This was “extremely high” in the currency low rate environment, Mr Oster said. “Hurdle rates tend to be slow to adjust, which can impact the potency of RBA rate cuts.”
A recent RBA research paper showed that a firm’s “gut feeling” was more likely to dictate spending than the current level of interest rates.
The upbeat reading from business firms today stands in stark contrast to consumer confidence, with this week’s ANZ-Roy Morgan consumer confidence index plunging to a 12-month low as nerves are rattled by China’s stockmarket fall and Greece’s debt crisis.