Alan Kohler’s quarterly outlook
Alan Kohler believes the credit crunch hasn’t finished collecting victims, Australia is in for a nasty hangover from household debt and a slowdown in growth is inevitable. But despite this gloomy outlook, he still thinks it’s all about China.
One way or another Australia’s economic growth is going to fall sufficiently for unemployment to do what it has done in the United States – rise to 5.5 per cent. That means growth must be below 2 per cent for 12 months or more.
That slowdown looks to be happening already, but that doesn’t matter: we know it is definitely going to happen because either the rise in petrol prices produce a big drop of consumer spending, or because the Reserve Bank will make sure that happens by raising interest rates some more.
No one wants to say it out loud, but the unemployment rate is going to rise because the Reserve Bank is determined to ensure that it does. Maybe petrol prices will do its work for it, maybe not.
Whatever – domestic-based earnings are going to come under pressure as a result.
Monetary policy works on unemployment by reducing aggregate demand. Lower demand leads to a short-term fall in prices; increasing the unused capacity of the labour market entrenches that lower inflation rate through reduced wage demands.
Up to now the Reserve Bank has been leaning into a gale: the record terms of trade from booming commodities prices has been pushing up gross domestic, so cutting demand has been a hopeless task.
The RBA has been raising interest rates for six years to no avail because income has been growing by 6-8 per cent for eight years, and in the past two years has become stuck above 8 per cent growth.
Population has also been booming. Normally that would help lower inflation, but perversely it is probably having a two-edged effect at present.
In 2007 Australia’s population grew by the largest amount since European settlement (and it’s a fair a bet it didn’t grow by more than that earlier as well).
There were 331,872 babies born last year – more in one year than ever before, and nearly 100,000 more than in the post-war baby boom. Net inbound immigration last year was 184,438, also the largest number in history.
In a way these things cancel each other out – immigration increases the pool of labour; babies reduce it through maternity leave.
Given the large number of two-job families these days, last year’s record immigration probably just replaced the reduction in the workforce caused by all the workers giving birth. But the result is a construction boom and more pressure on the transport infrastructure.
Construction is now a larger industry than manufacturing, partly because of the demand for housing and roads and also because of the resources boom.
All of which reinforces the idea that the Reserve Bank has been pushing a fat boy uphill in a billycart and still is.
The danger is that because of the rising oil price the crest of the hill arrives a bit earlier than expected and before you know it Governor Glenn Stevens is standing on the hilltop watching the boy in the billycart speeds down the other side, wailing.
Interest rate futures had been pricing in a high probability of rate increases all over the world because of rising inflation, but that was all revised when US unemployment unexpectedly kicked up to 5.5 per cent. It’s because higher petrol prices have an unpredictable double effect on the economy – raising prices but also acting like an interest rate hike and dampening demand.
In any case, petrol prices are now doing some of the work of central banks all over the world.
As a result, for the first time in history the US economy is sliding into recession as interest rates are being slashed. Australia might be doing the same. Earnings forecasts are being reduced by the day. Pessimism has returned to the sharemarket after two months on the sidelines.
This pessimism will, in my view, be worsened in the weeks ahead by a second round of subprime credit crisis issues. I don’t know exactly what form these will take, but I know the credit crunch has not finished collecting victims; the next looks like being Babcock and Brown and its satellites.
In Australia the sharemarket doesn’t know whether to be optimistic about resources or pessimistic about industrials and banks. A bit of each is probably a good idea; we have a two-speed economy and a two-speed sharemarket, and that’s likely to be the case for some time.
Consumer confidence has crashed as a result of the combination of higher interest rates and petrol prices and the all-important construction industry is also slowing sharply.
The 15-year debt boom in Australia that has supported bank earnings is clearly over, and with household debt well over 100 per cent of GDP a nasty hangover is likely. That will affect the earnings of firms that rely on consumer spending and borrowing.
But on the other hAnd, those firms that rely on consumer spending in China (resources companies) will probably be fine …. as long as China is fine.
So there – it’s all about fine China.
AUSTRALIAN MARKET UPDATE TODAY
Metals mixed overnight – Copper up 0.44% and Aluminium up 0.64%. Zinc down 1.31% and Nickel down 2.31%. Oz Minerals up 6.1% or 10c to 173c.
Oil price down $2.74 to $118.71 on belief that a slower US economy will reduce demand. WPL up 69c to 5189c.
Gold down $21.70 to $881.80. NCM down 71c to 2560c.
Bonds down with the 10 year yield up to 4.02% from 3.97%.
NAB announced the first phase of its Next Generation Platform initiative to replace core banking systems over the next 5-years. Up 90c to 2565c.
Beach Petroleum (BPT) announced substantial coal seam gas reserves upgrade – 282% jump in probable reserves at Surat Basin. BPT up 4c or 3.85% to 108c.
Newcrest Mining (NCM) says partial gas from Varanus island now flowing to Telfer mine – 50% of gas to Telfer under contract with Apache will now be possible. NCM down 2.7% or 71c to 2560c.
Tower Australia (TWR) said St George Bank’s switch to AIG Life as favoured new life insurance partner will impact around $60m on TWR’s $700m in-force book. No impact on FY08 with slight profit impact in FY09. TWR up 4.62% or 7.5c to 170c.Tabcorp (TAH) tipped by Weres to spend $400m in capex for its Star City casino. TAH expected to write down the value of its Victorian gambling license in FY results tomorrow. Analysts consensus for net profit before one-offs is $515m, up 14% on last year. TAH up 21c to 877c.
PanAust (PNA) confirms high-grade Copper-Gold at Puthep, Thailand – project study at feasibility stage and to be completed 1H09. PNA up 1.5c to 70.5c.
Seven’s (SEV) FY year results yesterday sees brokers holding or cutting target prices this morning – acquisitions seen as the key to unlocking value – buyback to support share price. SEV up 11c to 850c.
PaperlinX (PPX) being tipped by JP Morgan to report FY08 net profit of $50m, 32% down on FY07 on August 21st. PPX up 12.44% or 25c to 226c.
WA News (WAN) tipped by JP Morgan to post FY profit of $126m later today. WAN up 2.57% or 23c to 919c.
The market is up 132. Financials rocketing – up 4.2% after the strong lead from the US. The main theme has changed in the last 24 hours from inflation fears and pressure on interest rates to lower inflation and interest rate cuts.