Friday, November 27, 2015

Is Australian heading for a recession? Economist Frank Gelber says "no"

Is Australia heading towards a recession after around 25 years of unbroken economic growth?

That's the big question after the fast unraveling mining boom has seen business investment take its biggest dive since records began in 1989.

Listen to my interview with BIS Shrapnel chief economist Frank Gelber

With capital expenditure - or CAPEX - down 9.2 percent in the third quarter, the light at the end of the tunnel could be a long awaited recovery in local manufacturing and services.

Listen to Peter Ryan's reading of the business investment figures from yesterday's edition of The World Today

But there's one critical factor - maintaining a low or even lower Australian dollar which today is hovering at above US$0.72.

Frank Gelber, chief economist the the forecasting group BIS Shrapnel, does not believe the biggest business investment crash since records began in 1989 is enough to push the Australian economy over the edge into a recession.

But he warns Australia will continue to be rattled by falling investment in mining for a number of years yet.

"We're about 12 percent through a 60 percent decline in mining investment and that will dominate business investment figures over the next two years until we get to the bottom," Mr Gelber told The World Today.

"But we already have the seeds for the recovery in the lower dollar which will improve the prospects for trade exposed industries - tourism, education services, agriculture, business services and even manufacturing."

But Frank Gelber has one important caveat to Australia's non mining sector recovering - the direction of the Australian dollar.

"It's absolutely critical. If you talk about the non mining sector demand, profit and investments have been weak since the GFC (global financial crisis)," Mr Gelber said.

"And it will taker another few years for it to start to pick up but because of the low dollar the first sectors to recover will be those trade exposed industries which have effectively been in recession  for a decade for the period that the dollar was too high.

"Now they're going to have to spend money on refurbishment and then later investment which will start to broaden the recovery through the services sectors into construction and we will see a spin off into other non mining sectors which will gradually build momentum."

However, Frank Gelber says a much lower Australian dollar will be required to kickstart manufacturing which has seen Holden, Toyota and Ford recently announce plant closures - all decisions made when the dollar was at parity with the US currency.

But despite the uncertain outlook and the important of a consistently low dollar, Frank Gelber does not believe Australia is about to experience its first recession in a quarter of a century.

"No. We're going to have a soft economy until we finish the transition from the mining boom. It's another two years before we get there, probably three before we see non mining picking up."

The collapse in business investment makes next weeks official economic growth figures (GDP for the third quarter) a bigger event than it already and underscore the long term challenges as the Reserve Bank and Treasurer Scott Morrison manage the transition from the biggest mining boom in 150 years.

Monday, November 23, 2015

Greece economy stagnates under austerity and capital controls

It’s yet another lonely morning at Peter Voudouri’s shoe store in suburban Athens.

On what once would have been a bustling Saturday morning, a single customer arrives with an attitude in line with the austerity tightening household budgets across Greece.

The woman wants to buy shoes for her four year old daughter, but her opening line is to begin bargaining to bring the price down.

“I asked for small shoes for a formal dress for my child and I am asking if there is a better, lower price,” she tells me.

Listen to my report on the Greece economy broadcast on the ABC's Correspondents Report

This is the reality in Greece these days as the latest austerity cuts a swathe through consumer spending and capital controls – measures to limit withdrawals from banks – stagnates the already downtrodden Greek economy.

Great shoes - few customers. Peter Voudouri says austerity hit grandparents are staying away Ptcure: Peter Ryan

In what is now a damaging consumer cycle, the damaging of cuts to pensions means grandparents have less money in their wallets and no longer spend up as the dote on their grandchildren – sometimes handcrafted shoes from France and Italy.

“Grandparents are our basic customers in our kind of business because they want to get presents like new shoes for their grandchildren in comparison to their parents,” Peter Voudouri says.

“And it’s not only shoes but any present for their grandchildren – toys, clothing. It’s not only the shoes.”

Without controls limiting transactions and a financial lifeline from the European Central Bank, Greek banks would almost certainly collapse tipping the nation into a deeper economic and social abyss.

But Peter Voudouri says business is paying a massive price.

The controls mean significant delays in getting accounts paid and also paying suppliers. The cost of some transactions has surged by 3000 percent adding a new layer of costs for already struggling businesses.

The harsh medicine in return for another financial bailout means business of all sizes are going to the brink, says Constantine Michalos of the Athens Chamber of Commerce and Industry.

“The situation of the Greek economy can only be described as absolutely stagnant,” Mr Michalos told me in his Athens office.

“The implementation of capital controls is making life on a daily basis extremely difficult for the transactions that businesses need to carry out.”

In an example that illustrates the impact of the capital controls, Constantine Michaelos says Greek businesses are being choked with restrictions that would stun companies in Australia.

“Today if you set up a new business, you are not allowed to open a bank account. You can’t open a new business account.

“So you can imagine it’s extremely difficult, in some cases impossible, to transact business in this country.”

Constantine Michalos, president of the Athens Chamber of Commerce & Industry 

Capital controls are set to remain in place until at least next year while Greek banks are recapitalised.

Monday, November 16, 2015

Global markets nervous in wake of Paris attacks

The terror attacks in Paris are likely to push global sharemarkets lower today as investors confront a new layer of economic uncertainty.

Markets in Australia and Asia are set to open with a thud in the wake of the attacks and an earlier negative close on Wall Street before the carnage in Paris.

The All Ordinaries Index is set to open 37 points lower because of those combined factors according to the futures market.

But Shane Oliver, chief economist at AMP, told AM that while a kneejerk reaction is expected, markets are expected to bounced back after assessing the fallout.

"Terrorist attacks are horrible in terms of their human consequences and my thoughts are with those affected. But In terms of the impact on financial markets, there is no doubt that the attacks in Paris will contribute to short term investor nervousness," Dr Oliver said.

"But the experience with various Al-Qaida related attacks last decade is worth recalling - after an initial negative impact share markets bounced back as it was clear that there would not be a major economic impact and it seemed the effect on markets weakened as the terror threat continued.

"It only took just over a month for the US share market to recover from its 12% post 9/11 slump and it took the UK share market 1 day to bounce back from its 1.4% fall on the day of the July 2005 London bombings."

Global markets set to open in the red, according to futures, Source: Bloomberg

The French sharemarket and other bourses in Europe had already closed for the weekend before the Paris attacks occurred.

Wall Street also has ended lower on Friday US time because of some disappointing jobs figures restoked concerns about the strength of the US economy.

Analysts say markets in Australia and Asia were set to open lower anyway regardless of the Paris attacks but agree the loss of life, injuries and new uncerainty have the potential to damage investor confidence.

French financial markets will be open as usual late today Australian tijme but stocks exposed to the country's large tourism sector, are likely to suffer the biggest falls.

France has the largest number of tourists in the world and the sector accounts for almost 7.5 per cent of GDP.

Investors are likely to seek the protection of  bonds, cash and gold as markets assess the impact.

Friday, August 7, 2015

RBA says jobless rate to stabilise and fall in 2017

Today's quarterly health check of the economy from the Reserve Bank shows show quickly sentiment can change especially in periods of uncertainty when the default settling can be low expectations.

This time yesterday, economists were in "doom and gloom" mode after the ABS posted the surprise result that Australia's official jobless rate had spiked to 6.3 percent in July.

Now the RBA is painting a "less worse than expected" scenario and signalling that the July result might have been an aberration given that the jobs reading is known for its volatility.

In an unusually positive update, the RBA says Australia's jobless rate may have peaked and will stabilise before falling, according to the Reserve Bank's latest quarterly health check of the economy.

"Labour market conditions are generally better than expected a few months ago, though spare capacity remains," the statement says.

"The unemployment rate is forecast to be lower than previously anticipated.

"There has been a pickup in labour demand which has led to a noticeable rise in the employment to population ratio."

The RBA now believes the jobless rate will remain "little changed" over the next 18 months from a level that is "a bit lower than forecast" before declining in 2017.

The RBA's forecasts contradict some market economists who believe the jobless rate could still peak above 6.5 percent.

Australia's economic growth is also looking more positive with the RBA expecting it to pick up gradually to exceed three percent by 2017.

Despite the end of the mining investment boom, the RBA expects losses to be offset by strong growth in resource exports.

However, the RBA has also restated its concern that the transition from the mining boom to other non-mining parts of the economy is taking longer than expected.

"Businesses are waiting to see a sustained increase in demand before committing to major new investment projects," the statement says.

"Mining investment continues to decline as more projects reach completion but few new projects commence."

With concerns about the debt crisis in Greece abating, the RBA says the focus has shifted to how financial markets reactwhen the US Federal Reserve starts raising interest rates for the first time since 2006.

"This is expected to occur before the end of the year and is likely to be associated with an increase in global financial volatility."

The Reserve Bank believes once the Federal Reserve moves there will be an impact on the Australian dollar "which will depreciate further once the tightening commences."

On concerns about a real estate bubble in Sydney and Melbourne, the RBA noted that commercial banks had increased rates on investor lending after the Australian Prudential Regulation Authority (APRA) implemented measures to address the 

Wednesday, August 5, 2015

Westpac last of Big Four to dump payday lenders in "commercial" move

Westpac has become the last of Australia's major banks to cut ties with the controversial payday lending sector.

The decision by Westpac comes after a lengthy internal review into doing business with payday lenders who often charge exorbitant interest rates to sometimes vulnerable people.

Payday lenders Money3 and Cash Converters have been told by Westpac they will need to source their funding from other finance providers.

In a statement, Westpac confirmed it was a "commercial decision to exit customers who provide payday lending products".

"We .. will no longer support new customers where we are aware that they provide 'payday' lending products.

"We are currently working with our affected customers as they source alternative banking services.  We will honour existing contractual obligations as they manage this transition."

Shares in Money3 dived 7.5 percent while Cash Converter shares plunged 8.6 percent when Westpac's decision to dump payday lenders hit late yesterday.

Money3  confirmed it received notice from Westpac of the decision to end the relationship "with certain small amount consumer credit providers, including Money3".

"Westpac have committed they will honour all existing contractual agreements with Money3. The existing facility has a 12 month run off period after December 2015."

While Westpac says the decision to dump payday lenders was pragmatic, it is also protecting its reputation given the bank's policies on corporate social responsibility and increased scrutiny of the payday sector from the corporate regulator ASIC.

Payday loan providers have been criticised for targeting unemployed, disadvantaged consumers but also people in jobs who can't make ends meet.

Loans that are rolled over, or not paid back on schedule, can sometimes carry annual interest rates that can be in excess of 300 percent.

Goodshepherd Microfinance provides an alternative to payday lenders providing low or no interest loans sourced through a $130 million in capital provided by the National Australia Bank on a no interest basis.

Chief executive Adam Mooney, a former ANZ banker, welcomed Westpac's decision to dump their relationship with payday lenders.

"We hear daily stories of  people who have been caught in endless cycles of debt through very expensive forms of finance. It has an impact at a human level and an economic level," Mr Mooney told the ABC.

"This cycle of debt leads to additional anxiety, resources are held back within the family from food, education and health. At an economic level, it does lead to entrenched poverty."

Mr Mooney said payday clients helped by Goodshepherd had often been caught in a cycle of exhorbitant interest rates.

"Prima facie it seems like they're reasonable rates but when you keep cycling and keep taking that 20 percent upfront establishment fee on a $2000 loan, over a year you can end up paying 350 percent as an effective cost of finance."

Money3 and Cash Converters might now need to seek finance from overseas lenders or international debt markets to fund their payday businesses.

The move by Westpac follows moves by the other major banks including the ANZ, Commonwealth and the NAB to cut all exposure to payday lenders.