What a year that was

Who would have ever thought 2010 would end this way?

Australia with a minority Labor government, so soon after Kevin Rudd had been Mr 70 per cent.

Its economy sparkling, with high commodity prices, as America – once the engine of world growth – is sidelined with 9.8 per cent unemployment.

The Aussie dollar trading higher than the once almighty greenback.

And, perhaps the biggest surprise of all, Chinese industry reporting labour shortages.

Share prices, too, rising solidly again, though still well short of pre-crash levels.

So what lies ahead?

The economist, John Kenneth Galbraith, once observed that economic forecasts exist “only to make astrology look good.”

His colleague, Paul Krugman, though,  notes that signs, which will soon be seen as historic, are now appearing in global economic data.

He says  oil and commodity prices are increasing because living standards are rising in once poor countries, like China.

That’s not surprising, with a new middle class in China starting to drive private cars.

Prices for coking coal, iron ore and wheat are also at historically high levels, too.

All this suggests that Australia, with its resource based economy,  has at least a few years of prosperity ahead.

But we should not relax.

The new prosperity of China, India, Indonesia and other countries, will have second round effects, too.

It will add to the carbon emissions, which are already pushing the world towards global warming.

Initially that, too, will have advantages for Australia, which has vast reserves of a still relatively little used fuel, natural gas.

Only changed habits, though, will protect our planet, ultimately, from the ravages of global warming.

Attempts to introduce the necessary changes, though, have been less than encouraging, so far.

Serious divisions, even open, or armed conflict cannot be ruled out, in the years ahead, as demand for rising living standards meet the reality of increasingly scarce resources.

That is the dark cloud, on our otherwise bright horizon.

Shares boost super, but…

Australia’s superannuation funds are starting to recover.

An independent study shows that they have been posting some good results, recently.

They needed to.  Their reputations were badly damaged after  the share market crash scorched the retirement plans of older Australians, who left the nation’s work-force over recent years.

But the study, by SuperRatings, also confirms that there are still big problems.

Its Managing Director, Geoff Bresnahan,  says surging share markets, both here and overseas, contributed heavily to “positive result” of  9.8 per cent for 2009-10.

He said that had continued since then, with a 7.5 per cent rise in median balanced options, over the past six months.

Mr Bresnahan is impatient, though, with the Federal government’s decision to phase in some of the changes, recommended by the Cooper Review, over the next four or five years.

The Review looked at all aspects of Australia’s superannuation industry, which currently holds more than $1.2 trillion, in the nation’s retirement savings.  This is one of the biggest pools of investment funds, anywhere in the world.

Mr Bresnahan acknowledged that the share market crash had left the Federal government reluctant to make sudden changes to Australia’s superannuation system.

But he said that comes with a cost.

The recommendations, made by the Review, could have immediately saved Australia’s superannuation fund members  up to $1 billion.

“Unfortunately, this (delay) will be to the detriment of consumers, particularly in respect of the financial and process gains that can be driven out of some SuperStream proposals, virtually overnight,” Mr Bresnahan said.

“Having said that, the early adoption of the use of Tax File Numbers as a primary identifier in superannuation from 1 July 2011 is to be applauded,” he added.

“This simple change should transform Australians’ experiences with super funds.

“They would immediately be able to find all of their super accounts and consolidate them without having to run the gauntlet of collating reams of paperwork.”

They would not be frustrated, either, by dealing  with super funds that “intentionally try and stop the member from leaving.”

The situation has been dreadful.

“It is estimated that currently just 1 in 6 Australians successfully complete the process of consolidating their super funds,” Mr  Bresnahan said.

‘Most are simply frustrated out of the process by the current identification requirements and road blocks purposely placed by the funds.”

Baby pay? Yes, but..

A reminder.  Australia’s first publicly funded paid parental leave scheme starts on January 1.

That’s next Saturday.

It is not one to miss.

The new scheme offers up to 18 weeks’ pay – at the national minimum wage rate of $570 a week – from that date.

And you can apply in advance of your new baby’s arrival.  Almost 6,500 families have already done that.

The government is encouraging others to do so.

‘I know how busy it can be for new parents when a baby arrives,” the Families Minister Jenny Macklin said.

“So to make things easier, parents can lodge their claims up to three months before their baby’s due date.

“I encourage eligible parents to get in early and apply today,” Ms Macklin added.

So who will be eligible?

Women – or primary carers – whose babies arrive on or after January 1.

There is  an income limit.

The government says:”To be eligible the primary carer must have an individual annual income of $150,000 or less and to have worked prior to the birth of their baby.”

Australia is not a leader in this field.

Indeed Ms Macklin says the new scheme will see this country “catch up with the rest of the world.”

She spoke about it at a “baby shower” in Melbourne.

What, though, of women who work for companies which already have their own private paid maternity leave schemes?

This is no small question, as several big employers including Woolworths, Holden, Aldi and Rio Tinto already have their own paid maternity leave schemes.

Ms Macklin said these companies had all promised to keep their private schemes going, after January 1.

However she warned that the government would be “keeping a very, very close eye” on this situation.

Ms Macklin said the relevant unions would  ” have a lot to say” if a company scrapped a private scheme of this kind, after the public one was launched.

She described the Federal government’s new scheme as “historic.”

Expectant parents can go to www.familyassist.gov.au to claim their paid parental leave entitlements.

The Federal government expects the new scheme  to have a net  cost  $260 million a year.

Retailers wary on rates

Australian shopkeepers will be delighted to see Reserve Bank board members take a well earned break in January.

The board’s first scheduled meeting in the New Year won’t be held until February 1.

That means another interest rate rise in January is very unlikely.

Retailers blame the Reserve Bank’s decision  to raise rates by 25 basis points – in November -for the weak trading most endured in pre-Christmas trading.

The traditional Boxing Day sales, though, appear to have been a great success.

They set the nation’s cash registers ringing again and  that helped to offset poor trading earlier in the month.

But that success – largely in clearing stock – came at a cost.  Shopkeepers had to cut their margins drastically, to achieve that result.  Many see the heavy cuts, they had to make in pricing, as suicide trading, which can’t  be sustained.

The respected economic forecaster, Access Economics, predicted that the nation’s storekeepers would be in for “a turkey of a Christmas” after the November rate rise.

The Reserve Bank tried to offer some comfort in December, both by keeping rates on hold and  by hinting – strongly – that it is unlikely to raise rates rates again for a while yet.

It admitted frankly that  consumer confidence had fallen after the November rate rise.

And it  noted that  both consumer spending and the housing market had eased, as a result.

However the big crowds, that retailers saw in their stores on  Boxing Day have revived their spirits.

That led the United Retailers Association to predict that the post Christmas sales would see $7 billion flow through the nation’s cash registers, over the next two weeks.

“That is certainly within range at the moment,” the association’s president, Scott Driscoll, said.

Car sales rev up

Will you buy a new car next year?

A surprising number of Australians intend to do just that.

A new survey, by the Roy Morgan organisation, suggests that more than 700, 000 Australians will purchase a new vehicle in 2011.

Most  expect to place orders either for passenger cars or medium sized SUVs.

Norman Morris, Industry Communications Director, of Roy Morgan Research, said the car industry is still posting strong results.

“Short term intentions to buy a new car grew from 685,000 in the previous month, to 709,000 in November,” Mr Morris said.

He said this indicated growing demand over the coming year.

“At a brand level, the latest growth in short term intentions was driven by Holden, Volkswagen and Honda,” he added.

“Holden alone accounted for 18 per cent of future short term car buyer intentions,” Mr Morris said.

That strong demand is likely to continue.

The Roy Morgan organisation also estimated that 2,190,000 Australians will place orders for new cars sometime in the coming four years.

This estimate, also based on information collected last month, shows  demand projections had now remained above their long term average for the seventh consecutive month.

The organisation also reported a 2.5 point rise in consumer confidence in the week since December 11.

It said 59 per cent of Australians now believe this is a good time to buy a major household item, against the 17 per cent who believe it is a bad time.

That could give the nation’s shopkeepers a much needed boost, in the last few shopping days of 2010.

Banks face Storm action

Angry investors will soon see legal action in the case of the collapsed investment house Storm Financial.

This action, pursuing compensation, will target the Commonwealth and Macquarie banks, along with the Bank of Queensland and Storm Financial directors Emmanuel and Julie Cassimatis.

The chairman of the Australian Securities and Investments Commission Tony D’Aloisio, said the confidential discussions which ASIC had been holding with the key parties had not produced a satisfactory outcome in this case.

The commission has now confirmed that it has started the legal proceedings -  it foreshadowed on November 26 – in the courts.

ASIC will ask the courts to order the three banks to compensate customers they helped to invest in Storm Financial, by offering them advice and loans.

This proved disastrous for many investors, including a pensioner, Lyn Murray, of Nowra in New South Wales.

The Sydney Morning Herald reports that Ms Murray was shocked when the Macquarie Bank told her that she would be left with a $460,000 mortgage, after Storm’s collapse.

The Bank of Queensland and the Macquarie Bank will face breach of contract allegations. ASIC said it would also  allege unconscionable conduct, on their part, and breaches the Trade Practices Act.

These two banks  – and the Commonwealth Bank – will also face Federal Court proceedings based on their involvement in what ASIC alleges is Storm’s operation of unregistered managed investment schemes.

ASIC will also seek civil penalties against the two Storm directors for alleged breaches of section 180 of the Corporations Act, which relates to directors’ duties.

Mr D’Aloisio said ASIC would have preferred a commercial resolution of these issues.

But that had not been possible.

“Unfortunately” – the confidential discussions “had not produced a satisfactory outcome,” he said.

Houses:time to buy, perhaps

This could be a good time to buy a house.

Prices are flat – and likely to stay that way over the year ahead.

Interest rates rates are not likely to rise either, at least in the coming months.

And new data suggests that house prices are reasonably affordable, at present.

Buying a house, of course, is always a bold step.  It’s a big commitment.

It requires very careful study.  Your circumstances are unique – and that’s what counts.

The broad picture, though, doesn’t look too bad.

The Reserve Bank, for example, says the established housing market had “cooled.”

Broadly house prices  have been “tracking  sideways” since June, it adds..

“Auction clearance rates had recently fallen noticeably,” the bank says.

“In terms of housing construction,” it notes, “there was an increase in building approvals in October, following declines over previous months, though the rate of construction was still low.”

What, then, is the risk of a  “housing bubble”  bursting here?  After all, have  already seen that in both the United States and Ireland..

That risk, too, appears to be low.

True, the International Monetary Fund was worried about that, saying at first that Australian houses were “overpriced” by 25 per cent, an estimate it later lowered to 5 per cent.

However there are special factors in the Australian housing market that are not always obvious to outsiders.

One is a backlog of underlying demand for housing.

The Housing Industry Association says that  has been growing at the rate of about 150,000 a year.

This backkog is a product of the nation’s tight housing market. And, of course,  Australia’s need to attract skilled migrants, to fill the vacancies already apparent in  the nation’s booming resource industries.

So what of affordability?.  The HIA admits that the ratio of house prices to incomes has risen, over the past decade,  but says it is still just a little over four to one.

That suggests houses are still reasonably affordable, for Australian families on good incomes.

Rates likely to stay on hold

The Reserve Bank is hinting that Australia’s interest rates might remain on hold in the early months of the New Year.

In the minutes of its last board meeting, which have just been released, the bank said Australians are now spending so cautiously that expected increases in investment could occur, without driving up inflation.

It said the nation’s shopkeepers are still reporting that Australian families are  cautious in their spending and  that significant discounting remains widespread.

The bank also said that its board members  believe  that this spending restraint – and higher levels of savings – would help  to make room for the expected increase in investment.

However that does not mean that the Reserve Bank board is feeling comfortable and relaxed about Australia’s economic prospects.

The bank admitted frankly that its board meeting had been dominated by European financial troubles, particularly Ireland’s banking crisis.

“Conditions in financial markets over the past month were dominated by the situation in Europe, which had deteriorated markedly,” the bank’s minutes said, in an unusually frank admission.

“The focus was initially on Ireland,” the minutes said.

“But it subsequently spread to Portugal, Spain, Italy and Belgium.

“Bond spreads in those countries widened to their highest levels since the inception of the euro.”

The bank said the “contagion” from Ireland could still spread even wider than it already had.

And this could hit Australia.

The minutes of the meeting held in Sydney two weeks ago are printed in full below:-

Conditions in financial markets over the past month were dominated by the situation in Europe, which had deteriorated markedly. The focus was initially on Ireland but it subsequently spread to Portugal, Spain, Italy and Belgium. Bond spreads in those countries widened to their highest levels since the inception of the euro.

Members were briefed on the support package for Ireland from the European Union and the IMF. A significant part of the package was earmarked to support the Irish banking system, which is very large relative to the size of the economy. Members discussed the causes of the current situation in Ireland, which included a leveraged residential and commercial property boom, and the very rapid growth in the Irish banking sector. Among other risks, they noted that the Irish banking system had become highly dependent on borrowing from the European Central Bank (ECB).

The contagion from Ireland that had spread to other parts of Europe reflected the financial inter-linkages in the form of interbank exposures, as well as the European sovereign debt holdings of the European banking system. Credit spreads in interbank funding markets had increased to their levels around the time of the Greek crisis in May, though they were still well below the peaks at the time of the collapse of Lehman Brothers. Members noted that the cost of funding the large US dollar asset positions held by European banks had also been rising.

Bond purchases by the ECB had resulted in euro area spreads declining in the days prior to the Board meeting, although some markets were very illiquid. Notwithstanding this decline, members noted that the level of bond yields in several peripheral euro area countries remained high relative to expected growth rates of nominal GDP.

Credit spreads outside Europe had not been particularly affected and bond issuance in the United States had continued apace, particularly for non-financial companies. Spreads on highly rated corporate bonds in the United States had been steady in recent months, while spreads on lower-rated bonds had narrowed.

Activity in the domestic securitisation market picked up during the month, including a large issue without support from the Australian Office of Financial Management.

Members noted the US Federal Reserve’s decision to ease policy through further large-scale asset purchases. Speeches by FOMC members subsequent to the Fed’s decision and better-than-expected US data had seen the market pare back its expectations of further policy measures by the Fed. This had contributed to a rise in government bond yields in the major markets over the past month. Financial market volatility had picked up as liquidity declined towards the end of the year. Illustrating the diverse economic fortunes at present, members noted that the authorities in China, India, South Korea and Thailand all tightened policy over the month.

Global equity prices had recovered to around the peak reached in April, but prices of financial stocks remained well below that level. Chinese equity prices had fallen as concerns grew about the prospect of further policy tightening in China.

In foreign exchange markets, the initial reaction to the Fed’s policy announcement early in November was some further depreciation of the US dollar, but more recently the US dollar had experienced sharp moves in both directions. The euro had depreciated significantly against the US dollar over the past month. In the early part of November, the Australian dollar reached a new post-float high against the US dollar. Since then, reflecting the decline in risk appetite, the Australian dollar had depreciated against the US dollar, but it had appreciated against the euro to a new high. On a trade-weighted basis, the Australian dollar was around 2 per cent higher over the past month.

Members noted that mortgage rates had increased by more than the increase in the cash rate following the November meeting, such that mortgage rates were now slightly above their average since 1996. Currently, the market did not expect any change in monetary policy for the next few months.
International Economic Conditions

Members discussed how the financial turmoil in Europe could affect economic growth in that region. They noted that, for the euro area as a whole, the economic data continued to suggest moderate growth, though the differences across countries were large. Germany continued to outperform, with consumer and business confidence, and conditions in the labour market, considerably stronger than in the other European economies.

In China, attention was increasingly turning to the upside risks to inflation. Over the past year, the CPI was up by 4½ per cent, with food prices up by around 10 per cent. The authorities had responded by increasing the reserve requirements on banks and had announced a number of administrative measures to control price increases, but real interest rates remained low. The recent economic data continued to show robust growth in industrial production, investment and consumption, and there were some signs that merchandise exports were increasing again, after having fallen in earlier months.

Elsewhere in east Asia, the recent data had been mixed. The Japanese economy had recorded robust growth in the September quarter, though this was mainly driven by stimulus measures that had changed the timing of expenditure. More recent data in Japan had been quite soft, with most monthly indicators showing weakness in October. A number of other economies in the region had recorded declines in GDP in the September quarter, after large increases over the previous year. Industrial production and exports had been weak in the quarter, though the trade data for October suggested a significant pick-up in exports. Domestic demand looked to be growing solidly in most economies in the region.

Growth in the Indian economy remained strong, with GDP increasing by 10½ per cent over the year to the September quarter. Growth had been broad-based across sectors, with agriculture, manufacturing and services all expanding strongly over the year.

In the United States, the recent data had, on balance, been a little better than in earlier months. Most of the data for the labour market had suggested some improvement, though overall jobs growth in November had fallen short of expectations. Members observed that recent indicators of business investment, business conditions and household spending suggested that the economy was continuing to expand, albeit at a modest pace. The recent indicators for the housing sector, however, showed few signs of improvement. The household saving rate was well above the levels of the middle of the decade.

Reflecting the increased uncertainties about the global economy, base metals prices were lower over recent weeks. In contrast, the price of gold had risen. There had also been significant increases in the spot prices of the steel-making commodities, namely iron ore and coking coal, which were around 25 per cent and 10 per cent respectively above the December quarter contract prices, pointing to increases in contract prices for the March quarter. This was a stronger outcome than the staff had been expecting, and suggested upside risks to forecasts for the terms of trade and nominal income. The severity of the impact of the recent heavy rains in Queensland on coal production remained to be seen.
Domestic Economic Conditions

In the recent national accounts, GDP was estimated to have increased by 0.2 per cent in the September quarter and by 2.7 per cent over the year. Nominal GDP was up by 1.2 per cent in the quarter and 9.6 per cent over the year, boosted by the rising terms of trade, which had reached a new peak in the September quarter. Indeed, over the past decade, a significant part of the growth in real incomes had come from the terms of trade, with growth in standard productivity measures having slowed significantly relative to the 1990s.

The quarterly GDP outcome was a little softer than had been expected at the time of the November Statement on Monetary Policy. While the pick-up in business investment was proceeding in line with the forecasts, consumption growth had been weaker, as had dwelling investment. Overall, the expected rebalancing of growth from public to private demand looked to be occurring, though public demand remained strong. The accounts confirmed that conditions varied considerably across sectors, with manufacturing output having been flat over the first three quarters of 2010, in contrast to solid rises in output in the mining sector and of some professional services.

Other information received since the November meeting had been consistent with a strengthening in investment. Capital expenditure in the resources sector was estimated to have increased strongly in the September quarter, and investment intentions for 2010/11 continued to be very high. Members noted that there had also been further announcements confirming that several large resources projects were moving ahead. In contrast, outside the resources sector capital expenditure was broadly flat in the September quarter, and the outlook was considerably more subdued than for resources. There were still few signs that commercial construction was picking up. Business credit had fallen again in October, though broader measures of financing had been unchanged, and there was further tentative evidence that the availability of bank financing was easing for borrowers outside of the commercial property sector.

Spending and borrowing by the household sector remained subdued, with substantially revised estimates suggesting that the saving rate had returned to its level of the mid 1980s. While the Bank’s liaison continued to suggest modest growth, there was a surprisingly large fall in the ABS estimate of retail spending in October. Retailers continued to report that households were cautious in their spending and significant discounting remained widespread. Measures of consumer confidence had fallen somewhat after the increases in interest rates in early November, though confidence was still at an above-average level. Members observed that the restraint being shown by households, and the pick-up in the saving rate, would help reduce the medium-term risk from household balance sheets after a long period when debt ratios had risen, and would help to make room for the expected increase in investment.

Household credit had grown at only a modest pace for several months. The established housing market had cooled, with house prices tracking broadly sideways since June. Auction clearance rates had recently fallen noticeably. In terms of housing construction, there was an increase in building approvals in October, following declines over previous months, though the rate of construction was still low.

In the labour market, conditions remained firm. Employment was estimated to have increased by a further 30,000 in October, and the participation rate had risen to its highest level on record, with the unemployment rate increasing to 5.4 per cent. Members discussed developments in the participation rate, including the upward trend in participation by workers in the 45–54 and over-55 year age groups. Employment intentions generally remained solid.

The wage price index for the September quarter confirmed that wage growth in the economy had picked up from the slow pace of last year. The outcome in the quarter had been boosted by the earlier decision on minimum wages; abstracting from this, wages looked to be growing at around their average pace over the past decade. Members noted that some pick-up in wage growth was likely in the period ahead. Nonetheless, overall price pressures remained relatively modest at present, reflecting discounting activity and exchange rate effects, and measures of inflation expectations remained consistent with the medium-term inflation target. Members discussed the outcome of the CPI review by the ABS.
Considerations for Monetary Policy

Members noted that the deterioration in the situation in Europe over the past month had increased the downside risks to the global economy. How this would ultimately play out, and the implications for Australia, were difficult to predict. It was possible that conditions could settle down, as they had after the episode of financial instability in May. Alternatively, an escalation of the current problems was not out of the question. If this prompted a fresh retreat from risk-taking in global financial markets, it would probably have more impact on Australia than any trade effect.

Developments in other parts of the world had been more positive. The US economy was growing at a modest pace. Recent data suggested that the Chinese and Indian economies were growing more strongly than expected, and prices for bulk commodities had strengthened over the past month.

Domestically, the Board’s assessment of the central medium-term scenario was little changed from that made at earlier meetings. Employment growth remained strong and the expected pick-up in private investment looked to be broadly on track. Household consumption and borrowing, however, remained restrained despite high levels of confidence, and the saving rate had increased noticeably over the past few years. This restraint, if it continued, would provide some scope for investment to rise without causing aggregate demand to grow too quickly and inflationary pressures to build.

Following the Board’s decision in November to lift the cash rate and the subsequent increases in lending rates, and taking into account the level of the exchange rate, monetary policy was judged to be mildly restrictive. Given the very high level of the terms of trade and the positive outlook for business investment, this policy setting was regarded as appropriate.
The Decision

The Board decided to leave the cash rate unchanged at 4.75 per cent.