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Henry Thornton - Economics: A discussion of economic, social and political issues Australian Economy, Q2 2009 Date 28/06/2009
Member rating 4.2/5
Australian banks dominate world AA rankings
By Henry and Bert Thornton Email / Print

Australian banks head world rankings, 27/6.

Australia's big four banks now account for half of the world's AA ranked banks, after the economic meltdown cut the list from 20 to 8.

The Australian reports, 'THE top Australian banks have moved from world minnows to majors in the space of just two years as the global recession has claimed the majority of the world's largest and once safest financial institutions.

There are now only eight AA-rated banks in the world, and the Australian domestic brand names of CBA, NAB, ANZ and Westpac account for half.

Before the financial crisis engulfed the world there were 20 AA-banks. The robust state of Australia's banking system has been applauded globally and used as a benchmark for regulatory reform.'

Several analysts believe the Australian banks will emerge even stronger from the international downturn.

'Deloitte financial services partner Chris Cass said the Federal Government was keen to participate in global reforms and had also moved to instigate its own changes, particularly on the banks' role in consumer credit standards.

"The top four banks are extremely well placed to take advantage and withstand whatever remains of the Global Financial Crisis (GFC) and to pull out of the end of it in very good shape," Mr Cass said.

"In terms of regulatory change I think it's going to be more of a tweak. The Australian Government is taking a strong leadership position in the G20. From my reading, the government is determined that Australia will play its part where it's appropriate."'

Contraction of Australian millionaires, 26/6.

The number of Australian millionaires has fallen 23.4% from 2007-2008, reports the Australian.

The Australian reports, 'Now ranked eleventh after two years at tenth, Australia's high net worth population – individuals with net assets of $US1 million ($1.3 million), excluding their primary residence - fell 23.4 per cent from 2007 to 2008.

That is greater than the 14.2 per cent drop in the Asia-Pacific region and the 14.9 per cent fall globally, according to the World Wealth Report by Merrill Lynch Global Wealth Management and consulting firm Capgemini.'

Falling stock markets, low saving levels and the end of the housing bubble were the principle reasons for the decline of Australian millionaires.

'The decline in wealth was a result of three factors, the first being lower growth in overall economic activity arising from a fall in demand for commodities.

It was also a consequence of weaker stock markets and a lower savings rate arising from an increase in household debt and falling property values.

“After a few years of robust growth, the ASX (Australian Securities Exchange) declined by almost 50 per cent last year, and this was the most important factor contributing to the decline in overall high net worth population and wealth in Australia,” Mr Li said.'

Australia also dropped out of the top ten millionaire nations. Brazil took our position as the tenth rank.

Aussie dollar slides to four week low, 24/6.

The Aussie dollar fell to a four week low yesterday as the world economic outlook deteriorated.

The Australian reports, 'The dollar closed at US78.36c, down US1.55c --or 1.9 per cent -- from Monday's close of US79.91c. During the day, the local unit moved between US78.75c and US77.92c -- the latter its weakest level since May 28.

The dollar opened at US78.61c after dropping US1.3c in offshore trade as investors absorbed the latest pessimistic growth forecasts from the World Bank.The unit remained under pressure throughout the Asian trading day but found support late in the session after dipping below US78c in afternoon trade. '

A securities analyst commented, '"It's a welcome reminder that the world is a fragile place. It doesn't necessarily mean it's going to get worse before it gets better, but we're certainly a long way from a global turning point."'

Trans-Pacific Australia to Los Angeles route getting crowded as Delta Airlines set to launch cross-Pacific flights from July 1, 21/6.

The trans-Pacific air route between Australia and, generall, Los Angeles, has been one of the world's most profitable over the years. The reason being, it has long been a cosy duopoly between Qantas and United Airlines since Pan-Am left the scene in the late 1980s.

That is all changing at the moment though and new competition on the route is driving margins down and putting the carriers that fly it under increasing pressure. American giant Delta Airlines is soon to being flying the route, with flights due to commence on July 1.

Australian carriers are not immune to the pressure these new competitors are bringing to the route - Virgin only began flying the route earlier this year and 'says its $60 million investment in its long-haul subsidiary, V Australia, will be hard to recoup in this economic climate.

'Less attention has been paid to the impact on the other airlines flying from Australia to LA: the troubled US carrier, United Airlines, and yet another US competitor, Delta, which will begin flying the route on July 1. Delta revealed last week it would cut back its international flights by about 15 per cent at the same time as it is committed to launching a new daily service between Los Angeles and Sydney.

'The Delta service, along with V Australia's daily flights from Sydney to LA, will increase the number of seats on the route by about 30 per cent during one of the most severe recessions in international travel in half a century of the jet age.

'Meanwhile, the outlook for United Airlines is even more bleak. The carrier has flown the Sydney route from Los Angeles and San Francisco unchallenged by any other US competitor since the fares bloodbath of the 1980s.'

Auto downturn snares Ford Australia, 20/6.

Ford Australia has announced dire sales figures that pushed the company to a $274 million loss.

The Australian reports declining car sales and a volatile sharemarket hurt Ford's performance.

'FORD Australia plunged to a $274.4 million loss last year as buyers shunned large cars and the company wore a $162.2m restructuring charge to restore its fortunes.

The collapse in the stockmarket also forced the company to spend $151m propping up its superannuation scheme for workers.

Ford Motor Company of Australia, which is wholly owned by Ford in the US, said losses more than tripled from $87.2m in 2007 as sales revenue fell 7.4 per cent to $3.06 billion.'

However, the company was optimistic of a recovery beginning later this year.

'“Our current cash flow forecasts indicate a return to positive operating cash flows in 2009,” the Australian company said. “Furthermore, if required, we could receive additional support from Ford US to continue our operations.”'

Recession or depression, 19/6.

This is the question, Virginia, and Henry presents the views of two heavyweights of world journalism. Plus his judgment that the outcomes are still in the balance.

The graph below, courtesy the Oz, provides nice perspective on Australia's history of boom and bust.

  Courtesy The Australian

Ivanhoe and Rio negotiate over new Mongolian mine, 18/6.

Mining companies Ivanhoe and Rio Tinto have entered negotiations with the Mongolian government to open a new mine there.

The Australian reports, 'Mongolian president-elect Tsakhiagiin Elbegdorj reportedly told Bloomberg that he wanted changes to the proposed deal with Rio Tinto and Invanhoe Mines under which the government would take an equity stake in the project.

Instead he suggested the government take 50 per cent of profits, as well as proposing changes to a windfall tax. '

The deal has been years in the making, but there is now new incentive to speed it up with the economic downturn. Mongolia's mining industry has been hit especially hard and is desperate for renewed investment.

'Talks to forge an investment deal have dragged on for years, and particularly after Mongolia’s government in 2006 announced it would seek a stake of up to 50 per cent in strategic mining projects, as well as imposing a windfall tax on company profits from copper and gold production.

Mongolia's government is under pressure to move forward on Oyu Tolgoi, after its economy was hit hard by the slump in prices for its main export commodities - copper and coal - which forced it to seek loans from the International Monetary Fund. '

Australia's deficit and debt a national scandal, 17/6.

Australia's deficit and debt is a national scandal, based as it is on generous handouts, spending (on school refurbishment and home insulation of dubious merit) and a fiscal propensity to offer what are in effect electoral bribes of one sort and another.

But, so far at least, Australia's position is far from the worst in the western world.

Henry's Blog today comments.

RBA saw no reason for June rate cut, 16/5.

The RBA's June meeting minutes show it was not convinced that further rate cuts were needed.

The Australian reports, 'The minutes are in line with the central bank's statement immediately after the June meeting and will likely reaffirm views among some analysts that policymakers are satisfied that a swift pace of easing since September is having the desired effect, while at the same time retaining an option of further rate cuts if conditions take a fresh turn for the worse.

"Board members did not see a pressing case for any further action at this meeting, though they viewed the inflation outlook as affording scope for some further easing of monetary policy, if that were to be needed to support demand at a later stage," according to the minutes.

The RBA said that keeping its cash rate target on hold at 3.0 per cent is consistent with stimulating growth and low inflation, with "adequate flexibility to respond to developments as needed over the period ahead".'

The minutes also revealed the RBA is cautiously optimistic of a China-led recovery beginning later this year.

'For global growth, the board expects a subdued recovery over the next year or two, though they noted further signs that growth had picked up in China.

"While some uncertainty about the durability of China's economic recovery inevitably remained, there were reasonable grounds to expect that the Chinese economy would continue to record solid growth outcomes," the minutes said.'

Commonwealth Bank raises its variable mortgage rate today to 5.74%, Treasurer Wayne Swan slams the move as "selfish," 15/6.

Australia's largest home-loan lender, the Commonwealth Bank of Australia (CBA) has today raised the rate on scores of its fixed and variable mortgage products - including it main standard variable mortgage rate.

'The move means that customers of the country's largest home loan lender will be paying an extra $18 a month on an average loan of $300,000 from Monday. The CBA's move marks the first increase in floating mortgage rates since the last cut in official cash rates by the Reserve Bank and reverses the reduction passed on by the Commonwealth at that time.

'That will see the rate of its main home loan product rise by 10 basis points from 5.64 per cent to 5.74 per cent.'

The Government is certainly not happy about the move, as it is likely to be the first of many upward moves in mortgage rates over coming months as worries about inflation increase.

'Treasurer Wayne Swan has branded a decision by the Commonwealth Bank of Australia to raise its home loan interest rates as "selfish." Mr Swan said the decision, which has raised fears other banks will follow, will hinder the economic recovery.

'"The decision by the Commonwealth Bank gets in the way of interest rates relief, measures to stimulate our economy and to support jobs," Mr Swan told journalists in Brisbane.

'"I think Australians rightly will be furious with the Commonwealth Bank for hindering the efforts of the Commonwealth government, the Reserve Bank and the community to support our economy during the global recession."

Asked if the decision was a snub to the government given it had put in place measures to guarantee bank funding, Mr Swan said: "I think it's a selfish decision from the Commonwealth Bank."

Other banks responded to the move with caution. ANZ's rates (5.81%) are "always under review," Westpac's rates (5.81%) are "something that are constantly under review" and the NAB has "no current plans" to increase its, now equal lowest of the Big 4 banks, rates (5.74%). Interestingly, the lowest rate for Australian home loans is being charged by Commonwealth Bank subsidiary BankWest, recently purchased from former British lender Halifax Bank of Scotland (HBOS) late last year, which has rates at 5.70%.

Whether BankWest continues with these low rates is something that is no doubt constantly "under review" by headquarters in Sydney.

Chinese investment succesful, Oz Minerals assets sold to Minmetals, 12/6.

'OZ Minerals shareholders have approved the $US1.39 billion ($1.7bn) deal with China Minmetals, according to proxy votes. The deal will give the Chinese state-owned company access to Australian resources.

The fact that this deal, and Hunan Valin's near 20 percent investment in second-tier iron ore producer Fortescue, have been allowed to pass through without undue heavy intervention from the Australian regulator - despite the fact permission was not granted by Treasurer Wayne Swan to sell Prominent Hill mine in outback South Australia as part of the Minmetals package, shows that targeted and, from an Australian perspective 'manageable,' investments will escape excessive regulatory scrutiny - but that investments that have far wider ramifications will come under the miscroscope of regulators and Government.

'Investors, who lodged proxies,  voted overwhelmingly in favour of the asset sale to Minmetals at the OZ Minerals annual general meeting today, following a week of aggressive attempts by other parties to put alternative proposals to derail the China deal.

OZ Minerals said at the meeting that up to 1.3 billion proxy votes had been collated and 92 per cent of those had voted in favour of the Minmetals deal. There are roughly 3.1 billion shares on issue and further votes are expected to be cast at the closure of today’s meeting.

'Macquarie Group’s $US1.4 billion offer to recapitalise OZ Minerals was rumoured to have been superior to a rival proposal by RFC Group and Royal Bank of Canada, but the OZ board rejected both.

'Both offers were highly publicised and both had claimed to offer a better solution for shareholders than the Chinese deal, but Macquarie pulled its bid late last night, hours before Minmetals boosted its offer by 15 per cent to $US1.39 billion.

'OZ Minerals said the Chinese company’s revised offer fell within Grant Samuel’s independent valuation of the assets for sale, of $US1.38bn-$US1.6bn.'

Labor market detiorating, slowly, 11/6.

'THE Australian labour market remains resilient amid the sharp global downturn, with the jobless rate edging up to just 5.7 per cent. The May unemployment rate was well below the average of rich countries, according to the latest OECD figures published earlier this week.

'Still, economists warn that the official labour force report shows a deteriorating trend that will result in more people out of work in coming months. Full-time employment has fallen seven out of the past 10 months.

'Analysts at Westpac said the resilience in total employment, which fell a much less-than-expected 1700, was due to a sharp rise in part-time employment offsetting a steep decline in full-time employment.

'The number of full-time jobs decreased by 26,200 in May, while the number of part-time jobs climbed 24,500, the Australian Bureau of Statistics said today.

'Prime Minister Kevin Rudd said: "This data confirms the global recession is continuing to have a direct impact on the Australian economy and Australian jobs." He added later the global economy was in better shape than it was six months ago.'

'Among the states, NSW had the highest jobless rate, with the figure jumping to 6.4 per cent in May from 6.1 per cent in April. A year earlier, about 4.7 per cent of the state's workforce was out of work.

'Victoria was the next worst, with a jobless rate of 5.9 per cent, up from 5.7 per cent in April. A year ago, the state's jobless rate was 4.3 per cent.

'Bucking the trend were South Australia and Tasmania, with both states recording a fall in the jobless rate last month. SA's tally eased to 5.4 per cent from 5.5 per cent in April. Tasmania's jobless rate fell to 5.7 per cent from 6.1 per cent.

'The end of the mining boom took its toll on Queensland and Western Australia.  Queensland's unemployment rate rose to 5.3 per cent  last month from 4.9 per cent in April. WA's jobless rate rose to 4.9 per cent in May from 4.6 per cent.

Henry's Blog today explains that 'Stagflation' is here, and before long will be there - far worse - in other developed nations.

Australian Federal Police targetting tax evasion, 11/6.

The top end of town was targeted in raids across some of Melbourne's wealthiest suburbs yesterday as part of an investigation into an alleged $38 million tax fraud. Homes, businesses and cars in Toorak, South Yarra, Bulleen, Ashburton and the city centre were searched as part of a crackdown on an alleged tax evasion syndicate.

Eight premises and four cars were raided by 60 Australian Federal Police and 20 Australian Tax Office members after a 17-month investigation. AFP national manager economic and special operations Mandy Newton alleged the scheme had cheated the tax office of tens of millions of dollars.

"The syndicate under investigation has allegedly concealed its income through the falsification of business records, in order to move an estimated $38 million through the companies and avoid tax,'' she said.

BHP cuts coal prices by 58%, 11/6.

In response to falling demand, BHP has cut the price of its metallurgical coal by 58%.

BHP noted that a steep decline in steel output had forced the company to lower prices.

The Australian reports, '"Terms for a significant portion of 2009 BHP Billiton metallurgical coal contracts have been concluded following settlements with key global customers," BHP Billiton said today.

"Based on settlements to date, US dollar (freight on board) prices for prime metallurgical coal products are expected to decrease by approximately 58 per cent from 2008 levels."'

IR challenges, 10/6.

Henry's Blog today discusses the IR challenges facing the Labor government.

Messrs Hawke and Keating obtained concessions through their 'Accord' with the ACTU.

Messrs Rudd, Crean and Ferguson, plus Julia 'The Boss' Gillard are battling the ACTU who are seeking to turn back the IR clock to 15 minutes after the hour from its position 15 minutes before the hour when WorkChoices ruled the roost.

Productivity plus equity finance, not debt, the key to sustained recovery, 8/6.

Henry's Blog today claims a key Rudd minister - Lindsay Tanner - has hit the key point in achieving a lasting recovery for the Australian economy.

'It's about productivity, stoopid'.

David Uren reports that Australia's foreign debt fell $21 billion in the March quarter, given the flood of bond issues from both the government itself and the banks underwritten by government guarantees.

'The past six months have brought a remarkable transformation in the way Australia finances itself, one that Westpac foreign exchange strategist Robert Rennie describes as "truly staggering".

"Early this year, Australia stopped funding itself in debt markets and moved to fund itself in equity markets," he says.

'Australia is emerging as one of the world's favoured risk investments at a time when there is a vast wall of money anxious to get set.

'The world's sharemarkets have risen by between 20 and, in the case of key Asian markets, 50 per cent from their low points, while commodity markets have soared 50 to 100 per cent. Investors who fled in the midst of last year's panic for the safety of US Treasury bills are looking for a piece of the action.

'Rennie's analysis of last week's balance of payments shows that in the year to March there was a $51bn equity inflow, with the bulk of this in the last six months.

'Over the same period, there was an unprecedented $24bn reduction in net bond and money market liabilities. This was driven mainly by a huge fall in short-term money market debt, as banks switched their funding to deposits. Since the peak of the financial crisis last September, short term has plunged $60bn'.

A focus on productivity growth, plus a switch from debt finance to equity finance - a recipe for sustained recovery.

Latest Roy Morgan Consumer Confidence for May 30/31 up 0.5pts to 104.7, 5/6.

The latest weekly rating of Australia's Consumer Confidence provided by Roy Morgan Research shows a slight increase in Consumer Confidence for the last weekend of May. Consumer Confidence has risen to 104.7.

This is the highest Roy Morgan Consumer Confidence Rating since early January, and clearly higher than a year ago - 14 points higher than May 2008 (90.7).

The good news for Australian retailers is that nearly half of Australians, 49% (up 4%), say now is a 'good time to buy' major household items - which is itself the highest for 18 months, since January 2008 - and well before the onset of the Global Financial Crisis in our living rooms and daily lives last September, with the bankruptcy of Lehman Brothers and effective nationalisation of AIG.

Pollster Gary Morgan puts a positive spin on the Rating:

“Despite dire predictions, and even pronouncements by Prime Minister Kevin Rudd and RBA Governor Glenn Stevens that Australia was likely to already be in recession, yesterday’s GDP figures (up 0.4%) released by the ABS show Australia is coping with the current global recession better than most countries.

“Over the past month the weekly Roy Morgan Consumer Confidence Rating has performed strongly (up 7.4pts since May 2/3, 2009 (97.3)). This strength suggests Australia will continue to grow in the coming months as the world attempts to emerge from the global recession.”

For full details see roymorgan.com

Senior funds manager warns against Rio deal, 4/6.

Ian Henderson, JP Morgan's head funds manager, has recommended Rio Tinto shareholders oppose the Chinalco offer.

The Australian reports he is against the deal, but expects it will carry with the needed majority of votes.

'"I'm going to guess most shareholders would vote for it," Mr Henderson said on the sidelines of the World Mining Investment Conference in London.

"If you don't want to own the shares, you can sell them."

Mr Henderson, who manages the JPMF natural resources fund for JP Morgan Asset Management and is a Rio Tinto shareholder, said he was not expressing a house view on whether the fund would vote for or against the proposed deal.

"My own view is that I would rather Rio maintained its separate nature as a company," he said.'

Australian economy grows 0.4% in March Quarter, avoids technical recession, 3/6.

The Australian economy appears to have dodged a recession with the ABS reporting seasonally adjusted growth of 0.4% during the March Quarter of 2009 as consumers kept spending - with the help of the Rudd Government's stimulus cheques - strong contribution from net exports, and increased construction activity for new homes boomed as buyers took advantage of the increased first home owner's grant.

There is a clear rebound in figures for new dwelling units in the first months of 2009 as compiled by the ABS.

Seasonally adjusted figures for the December Quarter 2008 showed the Australian economy contracting by 0.5% seasonally adjusted - the first contraction in eight years. However, the March Quarter's growth of 0.4% means Australia has narrowly avoided the technical recession that seemed inevitable only a few months ago - at least for now.

"Today's national accounts data shows a fairly large contribution to growth from net exports in the March quarter, and that follows a substantial contribution to growth from net exports in the December quarter," [Treasury Secretary] Dr Henry said.

"We've got two quarters now of strong contribution from net exports and, of course, the other strong contributor in this quarter is household consumption."

David Gruen, head of Treasury's macroeconomics group, also noted that although recent data showed business investment was in sharp decline, that decline was coming off a "very high base".

Debt and deficits bite, 30/5.

Michael Stutchbury opines: 'MALCOLM Turnbull and Joe Hockey have shown the Rudd Government's projections for paying off Australia's biggest net public debt build-up since World War II by 2021-22 are not credible. But they have yet to ram home how they would more responsibly deal with the worst global recession since the 1930s'.

Henry's answer - no handouts, no pink batts and school renovations, only additional spending which has a fighting chance to make Australia more competitive.

Oh, and also John Howard's idea to give the states a payroll tax holiday - making business more competitive and protecting jobs in one fell policy.

New debt set to peak at $100 billion, approximately one third Kevin Rudd's planned borrowing.

Such an outcome would seem possible according to former Treasurer Peter Costello. Stutchbury continues: '... Australia's budget has deteriorated more sharply than in those two previous recessions, which feeds into the Opposition attack on deficits and debt.

'Peter Costello made the case from the Opposition back bench during the week. All of the projected $32 billion deficit forecast for the financial year could be accounted for by the biggest surge in government spending since the Whitlam years. At 4.9 per cent of GDP, next year's forecast $57.6 billion deficit would be the biggest since World War II. The projected 18 per cent of GDP increase in the net debt burden exceeds the 14 per cent under the Keating government'.

Ours by right, 30/5.

'... the expectation that all Australians were owed an age pension by right ... remains unbroken. All these years later, the pension-is-mine mentality is still alive and well, as is the general view that governments exist to make up the gap whenever any of us are a little bit short.

'The problem is, our form of government is expensive and it does not pay for itself. Our tastes and expectations haven't changed, but our circumstances have. Until we stop looking to government to underwrite our lifestyles, we will all continue to live in a political bubble in which tantrums and taunts about who has the best pictures passes for genuine debate'.

More here from Shaun Carney, in an important article.

Investment spending drops steeply, 29/5.

Tim Colebatch reports: 'COMPANIES have slashed investment spending and cut back sharply on planned investment for the year ahead.

'The Bureau of Statistics reports that private sector firms cut investment levels by $2.25 billion, or 9 per cent, in the March quarter, from their historic highpoint in the last quarter of 2008'.

ANZ in box seat to pick up RBS Asian assets, 29/5.

ANZ's position has strengthened as the clock ticks on who will acquire RBS' Asian banking assets. Rival bidders Standard Chartered and HSBC of the UK have failed to submit bids as per the timeline outlined for bids to be submitted as RBS pulls out of Asia.

Most of the assets on the block were originally part of Dutch bank ABN Amro, acquired by RBS at an inflated price at the height of the market in 2007. ANZ's decision to raise $2.85 billion to help fund the planned purchase of RBS assets has been well received by markets - a pleasant surprise for a bank to come to market and ask for capital for a specific purpose - rather than just 'plugging gaping debt holes.'

Although no final decision on the RBS assets has yet been made, one must expect that there will probably be some split of these assets as different markets offer different levels of appeal to the three suitors.

Fortescue tells China to accept iron ore at Japanese price, 29/5.

Andrew Forrest, head of Fortescue, today told China it will have to accept higher iron ore prices or look elsewhere for imports.

Mr. Forrest argued his company will only sell ore to China at the same price it does for Japan.

Sarah Jane-Tasker reports for the Australian, 'Mr Forrest said there would be the standard push back from China during price negotiations but added “they can’t have it both ways."

“Either you have a benchmark system or a highly volatile spot price,” he said.

“The Chinese want the benchmark system, they want the predictability, but then again once it’s set, will they honour it?

“It will be interesting, whichever way China goes, it will have a formative impact on the future of the global seaborne iron ore trade. If they don’t accept the Nippon/Rio new benchmark, they will consign themselves to the spot market for all times and that certainly in the past has shown extreme upside volatility.”'

The Fortescue announcement follows Chinese demands for cheaper Australian iron ore earlier this week.

Weekly Roy Morgan Consumer Confidence Rating up 3pts to 104.2, 29/5.

The weekly Roy Morgan Consumer Confidence Rating has risen to 104.2. Although the ABS has not officially confirmed Australia is in recession - something which is due to happen next week with the release of the First Quarter growth figures for the Australian economy, Consumer Confidence is now 7.1pts higher than it was a year ago in May 2008.

This would appear to show the resilience of the average Australian to the torrent of bad news over the past 6-9 months, although it is also equally likely to be a result of the relative mildness of the slowdown in Australia - at least so far. Unemployment is still at historic lows, even dropping by 0.3% to 5.4% for the month of April according to the ABS.

'The rise in the weekly Roy Morgan Consumer Confidence Rating has been driven by an increase in confidence amongst Australians about the short and long term future.

'In a week 6% fewer Australians (now 45% - and the lowest since early October 2008) say we’ll have ‘bad times’ financially over the next 12 months compared to 19% (up 3%) of Australians that say we’ll have ‘good times.’

'In the longer-term, 39% (up 3%) of Australians expect Australia to have ‘good times’ economically over the next five years compared to 19% (down 3%) of Australians that expect ‘bad times.’'

Terms of Trade bonanza wasted, 28/5.

Michael Stutchbury concludes, and note the graph.

'If only we had stashed away more of that extraordinary one-off revenue boom, we would be much better placed now to ride through the recession and hitch back on to the Chinese recovery'.

ASIC overturns short-selling ban on financial stocks, 27/5.

The Australian Securities and Investments Commission (ASIC), one of Australia's most important regulators of financial markets, has lifted the ban on the short-selling of financial stocks after imposing a ban on the practice initially on September 21, 2008 in the wake of the unprecedented financial uncertainty and volatility striking markets at that time.

Whether the ban was helpful in reducing market uncertainty and volatility during the past few months is something that will be debated for years - what we can be sure of is that markets did not implode and have eventually stabilised, so the short-selling bans certainly can't be blamed for a catastrophic collapse in investor sentiment.

ASIC's statement says 'ASIC has reviewed market conditions and considers that the balance between market efficiency and potential systemic concern has now moved in favour of the ban being lifted.

'In reaching this view, however, ASIC notes that the global financial crisis and global recession continues to place pressure on Australia's markets. ASIC will not hesitate to reimpose the ban immediately (using its enhanced and clarified powers under the Corporations (Amendment) Short Selling Act 2008) and without consultation if it considers market conditions warrant such action.

'ASIC will, in its monitoring of the market along with the ASX, pay particular attention to short selling activity by participants (including activity by hedge funds and similar institutions) which could potentially harm Australia's financial system.'

Iron ore price negotiations sees South Korea's Posco following in lockstep behind Japan's Nippon Steel, 27/5.

'South Korea's Posco will follow its Japanese peer Nippon Steel and accept a 33 per cent cut in iron ore prices, sources said on Wednesday, a deal that moves the agreement one step closer to being accepted as a global benchmark.

'Rio Tinto yesterday said it had agreed to cut key iron ore prices to Japanese steelmakers by a third in this year's first contract.

'The long overdue settlement for contracts starting from April was in line with levels rumoured last week but some analysts have speculated the 40-year-old benchmark-setting system may not hold this year, as China has made strong demands for a deeper cut of around 45 per cent.

'China, which buys more than half of the world's traded iron ore, wants to see prices return to 2007 levels after six years of rallies have roughly quadrupled iron ore prices.'

RBA director sceptical of stimulus spending, 27/5.

Warwick McKibbin, director of the RBA, today announced stimulus spending by the AUstralian government was politically motivated and would only inflict more economic damage.

The Australian reports, '"Most fiscal policy doesn't do anything except switch spending from one period to another," the RBA director said.

"When you change fiscal policy, all you do is stimulate the economy today out of future possible growth."

Stimulus spending had to be paid for either with higher future taxes or reduced opportunities for the private sector so that the public sector could be financed.

"The only exceptions are infrastructure and similar spending, which raises the return to private activities," Professor McKibbin said.

"The most sustainable way of reducing a fiscal deficit is through strong productivity growth in the private sector."'

However, Mr McKibbin does not oppose the stimulus spending of all governments.

He singled out China for its economic recovery from government spending earlier this year.

'Professor McKibbin has also said there is growing evidence that China's $US750 billion ($958 billion) economic stimulus package has sparked a swift economic recovery in the emerging giant, a key market for Australian mineral exports.'

Don't mention the war, 25/5.

Henry's Raff Report this month looks at employment prospects by sector.

'Looking at history it seems that a thriving economy requires a thriving manufacturing industry. A thriving manufacturing industry needs investment from savings not consumerism ahead of the curve'.

'Don't mention the war' is the Rudd governments spin control - unlikely to keep the facts from Aussie barbeques as the recession deepens.

China demands cheaper iron, 25/5.

The China Iron & Steel Association has demanded that companies radically cut their prices of iron ore.

The Australian reports, 'The China Iron & Steel Association said yesterday it was seeking a 45 per cent cut in contract prices, exceeding analyst forecasts of a 30-35 per cent fall.

The target would push prices to 2007 levels of close to $US50 a tonne and would be significantly below the current spot price of about $US67 a tonne. Analysts said that because the spot price was slowly edging up, a 45 per cent cut would not be acceptable to BHP Billiton and Rio Tinto, which has stated it will not settle below the spot price. '

The demand will pressure major miners BHP and Rio into making a decision.

However, it is not certain the mining companies will accept this new offer.

'"The fact the spot price has moved up nearly 10 per cent in the last couple of weeks makes it even less likely the miners can accept that sort of drop," one analyst said.

"The question from Rio or BHP's perspective is would they be committed to moving to the next level of investment on expansion plans at prices down 45 per cent."'

China wants cheap iron ore to power its economic recovery from the world downturn.

BHP begs to differ on recovery, 22/5.

'THE chairman of Australia's largest company, BHP Billiton, has contradicted assurances by the Rudd Government, Treasury and Reserve Bank that an economic recovery is imminent, warning instead it will be "protracted and complex".

'Speaking at his old high school in Brisbane yesterday, Don Argus said he was "pessimistic" about prospects for recovery in the short term.

'His comments follow spirited defences by Treasury Secretary Ken Henry and Reserve Bank governor Glenn Stevens of growth forecasts in last week's federal budget. The economy is projected to grow above 4.5 per cent from the middle of 2011, a forecast economists have questioned and Opposition Leader Malcolm Turnbull has labelled "completely unbelievable".

' "(Dr Henry and Mr Stevens) have got the levers of the economy," Mr Argus said. "I've got a balance sheet, I've got revenue statements, I deal with customers, I'm a contributor to the Australian economy … I'm just calling it from where I see it."

In separate news, the Big Australian announced plans to develop a new uranium mine in Western Australia.

Bert Thornton's radical plan, 22/5.

Despite the conventional view that free trade is always and everywhere a good thing, Henry's son Bert dares to disagree.

Read on here.

Free trade pact with China would have significant benefits, 21/5.

A report released by the Australian China Business Council argues a freee trade agreement between the countries would be worth $146bn for Australia.

The Australian reports, 'A report prepared for the council by the Centre for International Economics found that trade liberalisation between the two nations would deliver a consistent increase in consumption of 0.7 per cent, topping at 1 per cent growth within two years of implementation of an FTA.'

The group said it would continue lobbying the AUstralian and CHinese government to move towards a free trade pact.

'"The Australia China Business Council has long advocated increased liberalisation between Beijing and Canberra, and this report confirms our view that a comprehensive agreement would yield major results for the Australian economy," ACBC national chairman Frank Tudor said in a statement.'

Henry's Blogs so far this week have focussed on speed of recovery, policy options and the role of Treasury.

Rudd Government's budget has been roundly rejected by consumers, 20/5.

'Coming on top of big falls in government electoral support in separate national opinion polls over the last week, the drop in consumer confidence has the potential to further contain the Government's ability to loosen fiscal settings if the global economic downturn worsens.

'Ratcheting up government debt further would risk an even bigger electoral backlash with contagion spreading quickly to financial markets.

'Consumer sentiment fell 4.3 per cent in May from April, according to a survey released today by Westpac and the Melbourne Institute. It was the second biggest fall in the index following the release of a federal budget in the last 10 years ....

IMF disagrees with four percent recovery growth, 20/5.

The International Monetary Fund expects the Australian economy will recover much slower than the Treasury has forecast.

The IMF said Australia would struggle to reach three percent growth recovery, contradicting the Treasury's more than four percent.

The Australian reports, 'The IMF's published forecasts contained in last month's World Economic Outlook indicate a deeper recession than foreshadowed in the budget, including a 1.5 per cent contraction this year followed by a weak 0.6 per cent recovery next year.

But previously unreported IMF "staff estimates" in its supporting online data base suggest the economy then will struggle to get back to its long-trend growth of a bit over 3 per cent by 2014. The IMF staff estimates suggest the Australian economy will grow 1.9 per cent in 2011, 2.8 per cent in 2012, 2.9 per cent in 2013 and 3 per cent in 2014.

This almost certainly would prevent the budget returning to surplus in 2015-16, while also limiting any inroads into unemployment.'

The exact rate of Australian recovery really isn't that important. What matters is the Rudd government's reckless response to the economic meltdown.

Unsustainable borrowing and spending was the root cause of the current downturn. How can the government continue this policy itself?

All of Kevin Rudd's handouts, stimulus packages and infrastructure spending will have to be paid back with interest.

A far more sensible approach would be to cut unnecessary government programs and spending and return to a balanced budget.

World recovery by year's end, 19/5.

The RBA today announced it predicts the world economic recovery will begin in late 2009.

The Australian reports, '"There are good grounds to think that both countries [Australia and Canada] should be in a relatively good position and well placed to take part in a renewed international expansion," Mr Stevens said.

"It is too soon to say this is beginning yet, though developments over recent months are certainly consistent with the view that a recovery will get under way towards the end of the year.

"That said, most observers think that the early part of any new global expansion will be characterised by pretty slow growth."'

The Governor also argued Asia, led by China, will drive the world recovery.

'"Chinese industrial output fell for four months between July and November, but has since recovered all those losses," Mr Stevens said.

Other positive signs have emerged from other key Asia economies.

"A similar pattern has been seen in Korea, where industrial output suffered a sharp decline around year end but apparently made up about half of that over February and March," he said.'

The RBA's comments are consistent with another report earlier this week. Click here to read more.

RBA bets on China-led recovery, 18/5.

The RBA is optimistic China will lead Australia out of recession and mitigate the current economic meltdown.

The Australian reports, 'The RBA said production in China's transport and construction sectors had increased noticeably of late, and its steel mills were rebuilding inventories.

It said Australia, as a low-cost supplier of coal and iron ore, should benefit, and predicted that indications of stronger growth in China and early signs of stabilisation in east Asia and the US would prove durable.'

Chinese consumer spending has held up and the government's stimulus packages appear to be working.

China's economy is expected to grow at 6% this year, down from last year's more than 8%. The country also has much lower levels of debt than the American and European economies.

Local shares sag, 12/5.

'SHARES fell 1.2 per cent after a sell-off in global equities and commodities and as the market anxiously awaited the federal budget.

'As investors braced for the toughest budget in years as well as a grim report card on the Australian economy, they took comfort from a sharp increase in Chinese iron ore imports in April and a sixth straight rise in monthly housing finance in Australia'.

Business conditions recover, 12/5.

The latest NAB business survey showed a rise in confidence and optimism for April.

David Uren reports several indicators of business conditions improved over the month.

'The survey found that the number of companies with falling sales now outnumbers those registering an improvement by only 3 per cent. In February the number with falling sales was 15 per cent greater.

One of the key measures for the RBA is the level of forward orders. The net number of companies with falling forward orders has dropped from 27 per cent in February to 11 per cent now.

The number planning to cut staff has fallen from a net 27 to 18 per cent.

Business confidence, which touched an all-time low of -32points in January, is now at -14 points.'

It is too early to know whether this represents a fundamental reversal of the economy. Employment levels also improved for April, but Henry believes this was a temporary glitch at best.

Only time will tell whether the worst of the downturn has passed.

Rudd defends stimulus spending, 12/5.

The federal government's stimulus spending has stopped unemployment reaching ten percent, according to Kevin Rudd and Treasury officials.

The Australian reports, 'The advice, to be published in the Budget which will be unveiled tomorrow night, says the nearly $90 billion in stimulus spending has helped to reduce unemployment queues, Mr Rudd said.

"This Treasury advice finds that if the Government had done nothing, national unemployment in Australia would have been forecast to reach 10 per cent," he said.

The jobless rate for April fell unexpectedly to 5.4 per cent last week, a fall of 0.3 per cent, but it is predicted by some forecasters to rise to 8.5 per cent in the coming year.

Mr Rudd said the Government action meant a significantly lower unemployment forecast would be in the Budget papers.'

Employment rates did improve in April after stimulus spending, but one month's data does not conclusively prove the government's economic policy has been a success.

Henry and Bert expect the worst of the economic downturn is still to come. The April employment figures are most likely a temporary glitch.

See Henry's Blog today. And please think about the graph below.

Australian exports show resilience, 11/5.

The worldwide economic downturn has not yet devestated Australia's key export industries. Michael Stuchbury reports Australian mining and farm exports have resisted the meltdown and are quickly recovering.

'Although global manufacturing exports, such as machinery and cars, have collapsed, Australia’s export volumes have hardly fallen since the crisis hit in September.

Iron ore volumes to a recovering China rebounded to new highs in the first few months of this year, even as global steel production collapsed by a quarter.

While coking exports are down, thermal coal exporters shipped out 12 per cent more volume to fuel offshore power generation in the first six months of the crisis.

Rural exports have picked up, largely due to a hefty 2008 wheat crop, and liquefied natural gas export volumes are up 22 per cent in the past six months as a fifth processing train has come on stream in the North West Shelf. And oil export volumes are up 15 per cent. '

In contrast, manufacturing countries (China excluded) have been hardest hit by the financial crash.

'Australia is lucky manufacturing accounts for only 19 per cent of its exports, compared with more than 90 per cent for China, Japan and South Korea, and more than 70 per cent for the US, Europe and Britain. Japan’s export volumes have almost halved, but Australia has experienced “only a relatively modest decline” because of its resource exports and the boost from a weaker dollar.'

Does this mean Australia will make a swift recovery? Stuchbury seems to think so, but only time will tell.

Business conditions pick up in April, 11/5.

'A monthly survey of over 400 businesses by National Australia Bank, released today, showed business conditions lifted seven points in April from March to a reading of minus 10 points. The survey was conducted between April 24 and April 30.

'Business confidence fell one point in April from March to minus 14 points, NAB said.

"There is little doubt that the results of the April survey represent the most encouraging set of numbers for some time," said Alan Oster, chief economist at NAB.

'The survey result is the latest in a string of economic reports pointing to signs of recovery at the start of the second quarter.

'Rising retail sales, stronger building approvals and a record trade surplus are among recent data showing that the economic slowdown has at least bottomed out'.

Jobless rate falls in April, 8/5.

The Australian economy improved in April to cut unemployment from 5.7% in March to 5.4% at the end of April. The news surprised most analysts and economists.

The Australian reports, 'The unemployment rate fell to 5.4 per cent in April from 5.7 per cent in March, with the creation of 27,300 new jobs.

Economists had expected the unemployment rate to reach 5.9 per cent, with the loss of 25,000 jobs.

The employment figures marked the first decline in eight months and, along with this week’s surprisingly strong retail sales and trade data, have reduced the chances of a cut to interest rates next month, economists said.'

The figures may encourage the Reserve Bank to lift interest rates earlier than expected.

'ICAP senior economist Adam Carr said the data showed “the Australian economy is clearly much healthier than we’ve been hearing from some quarters”.

He said the data supported his view that the RBA would raise rates by the end of this year.

“With the dataflow thus far and the hints of recovery globally, I’m sticking to my view that the RBA will be hiking rates by the end of the year - and, if anything, the risks so far are that they’ll hike earlier,” said Mr Carr.'

Click here for Henry's discussion of interest rates in yesterday's blog.

Unemployment rises, but also falls, confusion reigns, 7/5.

The badly compromised official (ABS) workforce statistics today added to the confusion.

Actual figures are not prominant.  But so-called 'Trend' unemployment rose by almost 20,000, while 'Trend ' employment fell by a measly 4,000.

But in seasonally adjusted terms, unemployment fell from March's 5.7 % to 5.4 % in April, totally implausible.

And the ABS reported that seasonally adjusted employment rose by 27,000.

Methinks there is something very odd about these numbers.

Compare them with headlines of job losses and the situation of people you know who are working less hours, taking holidays and being fired or retrenched.

Malcolm Maiden of the Age called the numbers 'Fairy tale jobless figures'.

The ABS jobs data is often wrong.  In my day as a forecaster it took three consistent results in a row before we'd even consider changing our predictions.

But the dud April job numbers spurred a market rally, and led even normally sensible people to say they might make the case for an interest rate hike.
Economists had predicted that employment fell by about 25,000 in the month, with the risk to that forecast being on the downside. Instead, it rose by 27,300, with the number of full-time workers rising by 49,100.  Que?
The ABS result was a decline in unemployment, from 5.4% from 5.7% in March. The markets had expected the unemployment rate to rise to almost 6%, a whistle-stop on its way to at least 7%, and probably 8% as the recession unfolds.
'So who has got it wrong?' asks  Maiden. 'Almost certainly, the Australian Bureau of Statistics has. Companies are still closing down and shedding jobs in this dowturn, no doubt'.
Maiden quoted Morgan Stanley economist Gerard Minack said after the numbers came out: 'Know anyone unemployed who's got a job lately?  Heard of any firms adding to their workforce?  In short, have you heard or seen a single good thing about the labour market over the past few months?'
Maiden continued: 'The markets are beginning to believe that an end to the slump is in sight, but it's still about a year away, and jobs are just about the last economic indicator to turn.
'The April jobs numbers are wrong. The downturn has more to go, and the jobless rate is going to rise: expect the impossibly optimistic employment picture painted by today's statistics to be revised in a month's time'.

RBA says China will drive recovery, 7/5.

The Reserve Bank of Australia expects strong Chinese economic growth will help drag Australia out of recession in 2010. The RBA left interest rates steady yesterday as the economy improved during April.

The Australian writes, '"The global economy contracted further during the first few months of this year. While the near-term outlook remains weak, there are further signs of stabilisation in several countries," Mr Stevens said.

"The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little.

"The considerable economic policy stimulus in train in most countries should help contain the downturn and support an eventual recovery."'

In the same article, the Australian reports unemployment is also expected to rise.

'JPMorgan has forecast unemployment will reach 9 per cent, which would mean a million people out of work in Australia.'

Spending splurge, 6/5.

'CONSUMERS spent a record $19.3 billion in March, spurred by the government's stimulus spending, raising the possibility that the nation may not yet be in recession.

'Retail trade jumped by a seasonally-adjusted 2.2 per cent in March, the Australian Bureau of Statistics said this morning, compared with expectations of a 0.5 per cent increase.

'The less volatile quarterly figures for the three months to March showed a rise in retail spending of 1.0 per cent after an 0.6 per cent rise in the previous quarter.

'Centrelink started distributing some $2.7 billion of one-off payments to single-income families and the back-to-school bonus in March as part of the federal Government's $42 billion stimulus package. The Tax Office will continue to make payments to taxpayers until May 16'.

Henry's Blog today looks at the rapid increases in unemployment, underemployment, budget deficits and national debt.

As someone once said: 'Blessed are the children, because they will inherit the national debt'.

Victoria tries to avoid recession with big spending, 6/5.

Yesterday, the Victorian government unveiled its 2009 budget. Labor will spend more than $11.5 billion on public services to avoid an imminent recession.

The Australian reports, 'The $11.5bn investment is expected to secure up to 35,000 construction jobs in 2009/10, particularly in transport and schools rebuilding. But the state economy is going to get worse before it gets better, with unemployment forecast to rise by almost eight per cent over the next four years. At the same time, growth will slow to a meagre 0.25 per cent next financial year. '

The Labor government achieved a $165 million surplus. But this was significantly lower than forecasts in May 2008 that exceeded $828 million.

RBA leaves rates on hold, 5/5

As predicted by most economists - even Henry - the RBA held back today.

Governor Glenn Stevens said:

*  While the near-term outlook remains weak, there are further signs of stabilisation in several countries.
*  The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little.
*  Conditions in global financial markets remain generally on a path of gradual improvement ...
*  The Australian economy [has] contracted ... with both domestic and international demand weaker.
*  Australian markets have seen a decline in term spreads and firmer equity prices over recent months. ...
*  Business borrowing, on the other hand, is declining ...
*  Monetary policy has been eased significantly.

The Board will remain vigilent - and read the full statement here.

Job ads plummet, further supports rate cut, 4/5

'JOB advertisements in Australian newspapers and on the internet fell 49.9 per cent on an annual basis, ANZ Group said today.
'On a seasonally adjusted and monthly basis, job adverts slipped 7.5 per cent to 136,770 in April'.

Australian inflation zero, supports rate cut, 4/5.

Australian inflation has fallen to a four-year low despite the unprecedented interest rate cuts taken by the RBA since August last year. The latest TD Securities/ Melbourne Institute inflation gauge rose only 2.1% in the year to April 2009, the slowest annual increase since May 2005 and it shows inflation is heading towards the bottom of the RBA's 2-3% "inflation over-the-cycle" target band.

The continued falls in inflation, coming despite the rapid interest rate cuts undertaken by the RBA, add credibility to the RBA's reasoning behinds the cuts in interest rates. Namely to stimulate the economy as it faced heavy contractionary forces and external shocks coming in from overseas.

' "The deceleration in inflation is pronounced, with inflation dropping from a recent annual peak of 4.8 per cent in June 2008," the survey said. During the of April, rises in the prices of health, holiday travel and accommodation and house purchases was offset by falls in the prices of fruit and vegetables, transport and rental accommodation.

'Fuel prices rose by 1.4 per cent in April and but were around 18 per cent lower from a year ago, the survey said. Housing rents fell by about 2 per cent in April and was up about six per cent from April 2008.

' "Inflation is all but dead, even allowing for what was clearly a temporary exchange rate induced blip in prices in January and February," TD Securities senior strategist Annette Beacher said.

'  "The recession is crushing pricing power to the point where the overall level of consumer prices has recorded a net change of just 0.3 per cent over the past seven months - that's an average monthly rise of less than 0.05 per cent," Ms Beacher said.

'The recession is killing inflation and now that the dollar has stabilised, Australia is confronting a greater threat of deflation, than any inflation risks.'

Source: theaustralian.com.au

Australian dollar hits 73 cents, 4/5.

The Australian dollar strengthened to seventy-three US cents after Friday trading on Wall Street.

The Australian reports the US dollar was weaker against most major currencies,'Holidays in several key European countries and in Japan on Monday reduced trading in currency markets, leaving major currencies becalmed for most of the session.

The yen was the only major currency to lose ground against the US dollar as the Japanese currency's safe-haven status continued to work against it.

"The willingness to add risk to the table is clearly there at this point," said Francoys Levert, managing director/head of foreign-exchange sales for Canada at State Street Global Markets in Montreal.'

Bert needs the Australian dollar to keep rising as he will be in Washington for the second half of the year. If only he'd bought American currency when the $A was above 90 US cents!

Henry's Blog today examines the 'green shoots of recovery' and suggests we need to take a bex and have a good lie down.

Chinese control of Australian minerals, 1/5.

China is increasing investment in Australian mining companies to secure valuable mineral rights writes Robin Bromby.

The CCP is heavily investing in Lynas Corporation and Arafura Resources to increase the supply of metals to China.

The Australian reports, 'But these elements have many military applications as well, which gives a political and strategic dimension to the announcement today that China Non-Ferrous Metal Mining will become the majority shareholder in Lynas Corp , a company which has the Mt Weld project in Western Australia, said to be the world’s richest undeveloped deposit of rare earths. The Chinese will commit a total of $500 million to Lynas, the first tranche being $US286 million to get Mt Weld into production at the rate of 10,500 tonnes a year of rare earth oxides.

It follows less than two months ago a deal which saw East China Exploration take a 25 per cent in the other main rare earths play, Arafura Resources. This company has rare earths at its Nolans project in the Northern Territory.'

This begs the question, should the Australian government allow such investment?

The Chinese government is not a private company and Australia is slowly losing ownership of its own minerals to a foreign country.

Foreign ownership of Australian mining companies is an especially divisive issue. Expect this debate to continue for some time yet.

Mining slump hits Fortescue, 30/4.

Yesterday, Forescue announced a steep fall in Q1 revenue and cut forecasted production by 15%. The mining company said earnings fell because of the global downturn and extremely bad weather in the Pilbara.

The Australian reports, 'Iron ore mined in the three months to March 31 was 6.55 million tonnes, down 23 per cent from 8.46 million tonnes in the previous quarter.

In a slideshow filed with the Australian Securities Exchange after the production result was released, Fortescue said its third-quarter earnings before interest tax, depreciation and amortisation fell to $US75 million ($105 million), from US$193 million in the previous quarter.

A 20 per cent fall in revenue to $US381 million was more in line with the fall in production, indicating Fortescue's costs increased over the quarter.'

The bad news pushed Fortescue's shareprice 4.13% lower.

Tough decisions await May budget, 29/4.

Wayne Swan has warned Australians to expect tough decisions in his upcoming May budget. The Treasurer hinted at the need for spending cuts and tax increases for the rich.

The Australian reports, '"The most important thing we are doing is providing more accurate, more contemporary information," Mr Swan said.

"We are in extraordinary times. We're in the middle of a global recession. The forecasts do need to reflect that."

In a briefing to state treasurers, Treasury Secretary Ken Henry said that while the economy was expected to recover in 2010-11, it would remain below trend. '

Recent forecasts predict Australian unemployment will rise to 8.5% by next year and government debt could reach $50 billion.

In response, the Liberals attacked the government for planning to spend too much and sending the nation deeper into debt. The criticism is justified, but the Libs need to clearly state how they would respond to the economic crisis.

It is not good enough to simply criticise Labor spending and not advocate an alternative set of policies.

Therefore, Bert has three of his own recommendations for the Liberal Party:

1. Cut government spending by at least 50% and commit to a balanced budget.
2. Abolish the income tax and move towards a sales tax and tariff revenue system.
3. Oppose any form of climate tax or trading scheme.

The Coalition desperately needs sound conservative economic policies, and any of these would help their quest for victory in 2010.

NAB proftis fall slightly, 28/4.

NAB reported a fall in first term profits from $2.69 to $2.66 billion. The board said the economic outlook was bleak but were optimistic NAB could ride out the economic storm.

The Australian reports, '"We're not providing guidance, but I think that you'd have to say that the next six to 12 months will be difficult," chief executive Cameron Clyne told reporters in Sydney.

"We're now entering a period of economic downturn and with unemployment predicted in 2010, it's a likely outcome that bad debts will continue to be an issue through 2010.

"Until we see the cycle start to normalise, we'll look at measured opportunities for capital raisings." '

NAB reported mixed results across its portfolios. Earnings in the United Kingdom and New Zealand were lower, whilst its Australian businesses returned improved profits.

Imports fall, exports holding up, 27/4.

Reports David Uren

Stimulus weak on productivity, saving, says Henry today.

And did Henry really hear on ABC radio that the Rudd 'I'm not perfect' Government plans to increase electoral allowances for politicians?

Roll on the change of government!

Rudd ought to axe first home buyers grant, 27/4.

According to Scott Murdoch, Kevin Rudd and Labor should not continue the first home buyers subsidy in the upcoming budget.

Murdoch argues the first home buyers grant is wasteful spending and significantly distorts market prices.

'The current payments are enough to distort the market and have created a bubble in the national property market. Deutsche Bank research has shown first home buyers are seeking much larger home loans -- up from $230,000 to almost $270,000 -- even though the domestic economic outlook is so poor. The February housing finance numbers, the most recently available, showed that in Australia approvals for new loans jumped by 3.2 per cent in the month to be worth $15.27 billion -- a good portion of which came from first home buyers.'

He also contends the subsidy encourages people to take on unaffordably expensive homeloans that were the root cause of the sub prime meltdown.

'At a time of such precarious economic management, the last thing that the economy and financial market need is a lopsided sector that is not operating on its fundamentals.

There are worries that when the effective subsidy does go, housing prices will dent the short-term future prospects of property in Australia.

It is a dangerous mix, with interest rates at historical lows, to be luring some consumers into the property market who simply shouldn't be there.
Either way, the last thing the the economy can afford is to have Australians who should not be there entering the property market.'

Let's hope Rudd and company heed Murdoch's advice.

Bad news finally accepted, policy direction wrong, wrong, wrong, 24/4.

The good news is that the bad news is finally being accepted.

The bad news is that the Rudd government's approach to policy - 'spend, spend, spend' is 'wrong, wrong, wrong'.

Henry's Blog today outlines a different approach.

'Henry would start with leadership from government on the need for a return to a more thrifty, restrained lifestyle'.

Core inflation surprises on upside, actual inflation down, 22/4.

'A surprising increase in core inflation in the first quarter has reduced the chances of another rate cut in the coming months.

'Core inflation – which strips out volatility – rose by a stronger than expected 1.1 per cent from the December quarter for an annual increase of 4.15 per cent.

'The result was well above economists’ expectations for an annual increase of 2.9 per cent.

'Headline inflation rose by just 0.1 per cent for an annual increase of 2.5 per cent, bringing the rate back within the Reserve Bank's target range of 2-3 per cent for the first time in three years'.

Shareholders vent anger at Rio AGM, 21/4.

Rio Tinto shareholders voiced their opposition to the Chinalco deal at the company's AGM yesterday.

The Australian reports shareholders directed their anger at senior board members.

'The atmosphere at Rio’s annual meeting in Sydney was charged with hostility towards the board and its outgoing chairman Paul Skinner.

'All resolutions were passed, based on the combined votes from the London and Sydney meetings, but a massive protest vote was made against Sir Rod Eddington.

'Almost 35 per cent of the vote, or 246,107,390 votes, were lodged against his re-appointment to the board. '

The Chinalco share offer was also highly contenscious.

'But it was the impending deal with the Chinese that gained the most heated responses, with shareholders concerned about the future implications of the deal.

The Rio executives, who previously flagged a “Plan B” should the Chinese deal fail, were keen to point out at today’s meeting that they were all committed to seeing the proposal through. '

However, investors gave the Chinalco deal the green light and it will move ahead.

Recession fears deepen, 15/4.

'AUSTRALIA is marching towards recession while the growth rate is shrinking to a "remarkable" degree, a leading study has found.

'The latest Westpac/Melbourne Institute leading index today said the economy shrank by 5.1 per cent in February; the index signals the likely pace of economic activity three to nine months into the future.

'The study found that the economy was set to keep contracting into a recession, with the rate of growth at a 26-year low.

'It was the lowest rate of annualised growth since September 1982'.

Recession hits Qantas, 14/4.

Qantas announced it will cut 1750 jobs and ground 10 planes because of the economic meltdown.

The Australian reports, 'Less than five months after taking over as Qantas chief executive, Alan Joyce revealed today the company would miss its full-year profit forecast by an extraordinary 60-80 per cent.

Its target of a $500 million profit before tax for the 2008-09 year has been slashed to between $100 million and $200 million. Given its profit of $288 million for the first six months of the year, this suggests the national flag carrier will report a loss for the second half.

The second-half loss will represent only the second time Qantas has fallen into the red since listing on the stock market in 1995. It last reported a loss _ a modest $10.8 million before tax _ in the second half of 2002-03 after the SARS outbreak caused a slump in air travel in the Asia Pacific region.'

Qantas was forced to cut 1000 jobs in July of last year too. The airline's shareprice dived more than 10% after the announcement.

Julia Gillard said the federal government expects more Australian companies will suffer from the downturn, despite major stimulus spending.

Meltdown claims Kleenmaid, 12/4.

The economic downturn has forced luxury kitchen and laundry company Kleenmaid into administration. It was unable to pay more than $67 million in debts.

150 staff will lose their jobs and 20 stores will go out of business.

The Australian reports recent Kleenmaid purchases and warranties may be treated as void. 'Mr Greig said customers who had paid deposits for goods not yet received would be regarded as unsecured creditors.

"Unfortunately, Kleenmaid will not be in a position to honour any existing warranties," Mr Greig said.'

Kevin Rudd also commented on the disappointing news, '"This is a tough time for many Australians, a really tough time," the Prime Minister said. "It's a time for all Australians to gather round and support those who have lost their jobs or are in danger of losing their jobs."'

Its tough out there, 9/4.

The (understated) official ABS measure of unemployment leapt today to 5.7 %, shocking the economic establishment.  Julia Gillard got to front the TV cameras - where was Kevin 'I'm not perfect' Rudd?  Deep in the bunker, Comrade, totally gobsmacked.

As we said last week: 'The Australian economy is already in recession and the time of labor hoarding (to keep good people on the books) is generally over'.

Glenn Stevens will be sorry he failed to take Henry's advice and cut cash rates by 50 basis points.  Glenn, you are on the wrong bus - recall our approach in 1981!

Dr Ken Henry will be scratching his head and deciding if he has to reviser the economic forecasts embedded in the budget papers.  Yes, Ken, if there is time.

The Productivity Commission, if they are fair dinkum, will be sorry they did not do more to advocate more spending on Research and Development (R&D) rather that handouts to those who earned less that $100,000.

Gadzooks, do all these worthies live in a completely isolated universe?  Apparently so.

Henry's guess is that real unemployment is rapidly approaching 10 % of the real workforce , with another 3 or 4 % underemployed.

See Australia's Forgotten Workers for more on all this.

Glimmers amidst the gloom, 9/4.

Consumer confidence picks up is good news, as are several recent examples of great good sense on remuneration.

Henry's Blog today focuses on the good news.

The bad news is the Rudd 'I'm not perfect' government's throwing money around like confetti, most recently on a new global, ellegedly best in class, broadband.

Consumer sentiment surges, Broadband spending splurge, 8/4.

'CONSUMER sentiment surged 8.3 per cent in April as the recent rally in global equities and Australian dollar eased economic concerns.

'Anticipation of the Rudd Government’s cash handouts to people earning less than $100,000 also buoyed the consumer mood, according to the Westpac-Melbourne Institute Index of Consumer Sentiment.

'It was the first increase in consumer sentiment since the index fell for three consecutive months, beginning in January. Consumer sentiment fell 0.2 per cent in March, from February levels.

'Westpac chief economist Bill Evans said the consumer sentiment result was "surprisingly strong" given unemployment had risen to 5.2 per cent'.

Henry's Blog today is called 'wet lettuce economic policy', referring to yesterday's 'no consequence (except for people trying to live off fixed interest investment) monetary policy adjustments.

Broadband, however, involved throwing the whole market garden at the problem, a 'mere' $43 billion.

RBA cuts interest rates by 25 basis points to 3 %, 7/4.

More good news for people with overdrafts or mortgages but not so good for those living on fixed interest.

Read Mrs Thornton's explanation of why so many clever people in the Australian economic policy establishment got things so wrong.

Next big local news is presumably the third Rudd stimulus package in the May budget, though RBA may cut again if economy and jobs keep on slippong.

Public opinion against Chinalco bid, 7/4.

Today's Newspoll shows six out of ten Australians want the government to block Chinalco's $27 billion bid for Rio shares. Chinalco is a mining company owned by the Chinese state.

Lenore Taylor reports, 'Fifty-nine per cent of respondents to a special Newspoll taken last weekend said they believed Chinalco should not be allowed to increase its stake in Rio from 9 to 18 per cent of the company, while only 31 per cent said they thought the federal Government should allow the investment to go ahead.

The $27billion bid, which requires government approval under foreign investment rules, is the biggest foreign direct investment proposal China has mounted and has generated heated debate about the extent to which it could give Chinese customers information and control over a key commodities producer. '

The Newspoll also found a majority oppose foreign ownership of Australian mining companies.

'More than half those surveyed -- 52 per cent -- thought foreign companies in general should not be allowed to buy stakes in Australian mining companies, with only 37 per cent believing that they should be allowed to do so.'

Bert is strongly against the Chinalco bid. The Australian government cannot surrender its minerals to a state-owned company (especially a communist one). If Chinalco was a private company he would not oppose the move.

Academic calls for higher taxes, 6/4.

Professor John Quiggin, an academic at the University of Queensland, argues the government should increase taxes to fund spending during this recession and onwards.

Not surprisingly the Whitlam Institute is sponsoring the essays.

Quiggin argues neo-liberal economic policy is to blame for the current meltdown.

Mike Steketee quotes Quiggan, '"The crisis is not a temporary aberration, to be followed by a return to the 'normality' of the late 20th century, dominated by the ideology of economic liberalism," he writes.

"Rather, the economic and social system that emerges from the global financial crisis will be radically transformed." '

Professor Quiggin supports Kevin Rudd's response to the economic slow down. He argues for tax hikes and the return of privatized utilities to state control.

But for all his socialist rantings, Quiggin approves of limited fiscal spending and free trade.

Australian unemployment falls, students go back to studying, 3/4.

The latest Roy Morgan Unemployment estimate for March 2009 has just come out - and perhaps surprisingly, it records a slide in the Australian unemployment rate - to 7.0% (down 1.0%). This may be surprising, but a closer look at the figures reveals unemployment nearly always falls in March.

The Roy Morgan Unemployment Index has recorded a slide in unemployment in March for the past 4 years - which happens to be the time Work Choices was introduced into Australian workplaces. March 2006 that is. It is not just Roy Morgan's figures that give March the wonderful property of reducing unemployment - a quick look at the ABS 'Original' figures shows the ABS has recorded falls in unemployment in March every year this century. We'll have to wait until next Thursday to see whether that trend continues.

So, although unemployment has fallen in March, as it generally does, it is still a high reading in comparison to previous March estimates. According to Roy Morgan, 775,000 (7.0%) of Australians are now out of work - which compares to 651,000 Australians out of work in March 2008.

In terms of the Australian workforce as a whole, there were 6,977,000 Australians working full-time in March compared to 3,255,000 Australians working part-time.

The Roy Morgan 'under-employed' estimate for March recorded 700,000 (6.4%, unchanged) Australian part-time workers looking for more work.

Pollster Gary Morgan commented that, "The latest Roy Morgan unemployment estimate for March 2009 (775,000, down 109,000) shows unemployment has dropped from its February high, although it is still the highest March unemployment since March 2006 — when WorkChoices began to be implemented.

“Since then Roy Morgan unemployment estimates, which are not seasonally adjusted, have dropped each March as university and other students return to study.

“Importantly, a key difference with recent years is that the number of Australians working full-time dropped in March to 6,977,000 (down 151,000) while the part-time workforce has grown to 3,255,000 (up 175,000). This is possibly the first sign of self-funded retirees re-entering the workforce.

“The large interest rate cuts by the Reserve Bank in late 2008 and earlier this year (dropping interest rates from 7.25% to 3.25%) and the effects of the Rudd Government’s stimulus plans have in the short-term supported the Australian labour market.

“Now, however, is no time to be complacent. The return to study of thousands of university and other students has helped to temporarily halt the upward trend in the unemployment numbers — but crucially, the figures for the March Quarter show an average of 809,000 Australians unemployed throughout the Quarter which is the highest Quarterly figure since March Quarter 2006.”

To see the full results, please visit Roy Morgan here.

Gold helps Australia to $2bn trade surplus, 2/4.

Australia recorded a $2 billion trade surplus in February thanks to high gold prices and a low dollar. This is rare good news as Australia officially enters recession. Exports soared 4% for the month, whilst imports fell 1%.

Meanwhile, the Australian reports on more gloomy predictions from world economic organizations. 'The Paris-based Organisation for Economic Co-operation and Development this week drastically downgraded its forecast for the world economy to fall by 2.7 per cent in 2009.

At the same time, the World Bank said it expected a contraction of 1.7 per cent, marking the first decline since World War II.

The International Monetary Fund forecast a decline of 0.5-1 per cent.

It’s even worse for the world’s richest countries, with the OECD expecting a contraction of 4.3 per cent and the World Bank tipping a fall of 3 per cent, along with predictions for unemployment to soar.

The World Bank said it expected global trade to shrink by 6.8 per cent.'

Many economists expect these dire forecasts and lower retail sales for February will push the RBA to lower interest rates next week.

How bad the recession?, 1/4.

Globally, very bad.

Domestically, could be equally horrible but need not be.

See Henry's Blog today.

Retail sales fall, 1/4.

We said the pre-Christmas 'sugar hit' would provide at best a small stimulus.

Retail sales fell in February by 2 %, illustrating our clear prediction.

And the national credit card has an extra $10 billion - what's a few billion among friends??

But Allison Jackson reports two other important bits of economic news. 

'In contrast, separate figures on the housing market show building approvals bounced 7.8 per cent in February from a 3.7 per cent fall in January, beating the market’s expectations for an increase of 1.5 per cent and marking the first rise since June and the biggest jump in 10 months.

'But in another official report, a job vacancies index for skilled workers fell by 10.8 per cent in March from February, and was 57.9 per cent lower from a year ago. The decreases were recorded in all 18 occupational groups measured by the index'.


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