Retail sales weak, low goods and services inflation, 4/7.

'Retail sales unexpectedly fell in May, denting the case for any near-term increase in interest rates by the Reserve Bank'.

Reinforcing this is the fact that June consumer price inflation was zip.

In addition, Henry has noticed that there are big discounts at the winter sales, and quite a few closing down sales - more than usual quite possibly.

Some local gurus are suggesting that all this may even mean the next rate change will be a cut - unlikely but possible, if effects of the the non-mining recession  outweigh effects of the mining boom.

John Durie discusses the 'wall of worry' clouding the investment outlook.

Stresses and strains in the 'miracle economy', 24/6.

More and more people are picking up on the fact that Australia is facing 'Mining boom and non-mining recession'. (Typo-free version here.)

I commend today Michael Stutchbury's 'Mining boom mark II heralds a new era of consumer pessimism' and Paul Kelly's 'Alarm bells sound on economy'.Consumer confidence plummets, 17/6.

'In mid June Consumer Confidence fell sharply to 108.3pts (down 5.5pts in a week) according to the weekly Roy Morgan Consumer Confidence Rating conducted last weekend — June 11/12, 2011. Consumer Confidence is now 9.3pts lower than a year ago, June 12/13 2010 (117.6)'.

NAB signals deteriorating business confidence, 14/6.

'SENTIMENT in Australia's business sector deteriorated sharply during May as executives complained of a two-speed economy with the much weaker non-mining sectors such as retail and manufacturing dragging on confidence, according to a leading monthly survey.

'National Australia Bank's monthly poll of business managers showed conditions for firms deteriorated in May. Its index of business conditions fell 4 points to an index reading of plus 1 point. The bank's index of business confidence fell 1 point to plus 6 points.

'Trading conditions, profitability, forward orders and employment all fell, while overall business conditions returned to levels last seen around January's Queensland floods'.

The mining boom and Australian interest rates, 7/6.

'THE global mining boom has shifted into top gear because of growing demand and surging commodity prices, with profits of the world's 40 largest miners reaching a record $US110 billion ($102bn) last year.

'That represented a stunning 156 per cent jump on the previous year and the start of a new stanza of growth that is forecast to continue as global demand increases and new projects are brought on stream.

'Last year's profits were built on record revenue of $US435bn, according to a PricewaterhouseCoopers report, "Mine: The Game Has Changed".'

Henry's blog today asserts that the Reserve Bank will be forced to raise interest rates soon, as the mining boom faces a budget still in deficit and a rigid labor market on the brink of a warges surge.

Retail splurge ... whoppee, 2/6.

Just when dismal GDP numbers for the March quarter cheered those punting on a delay to interest rate hikes, a 'retail splurge' for April reinforced the fact that life goes on and Aunstalian consumers, like the famous parrot were merely resting, not dead.

'CONSUMER spending grew at is quickest pace in almost two years in April, beating market expectations and signalling the Australian economy remains strong despite a first quarter contraction.

'Sales in April were at their highest since May 2009, led by a strong performance for department store sales and by the Easter holiday season which suggests second quarter growth is on track.

'Retail sales rose a higher-than-expected 1.1 per cent to $20.74 billion in April, from $20.51bn billion in March, and rose from $20.08bn a year earlier, the Australian Bureau of Statistics said today. Economists surveyed ahead of the announcement had, on average, expected a 0.4 per cent rise in sales for April. In March, sales had fallen 0.3 per cent'.

"You can't really find too many holes in that retail sales number," said Su-Lin Ong, RBC Capital Markets Senior Economist. The currency rose modestly after the release and front-end bond futures slipped.

Australian economy contracts as natural disasters disrupt exports, 1/6.

'Gross domestic product dropped 1.2 per cent in  the March quarter, from a rise of 0.8 per cent in the December quarter. Forecasts centred on a 1.4 per cent contraction.

'The last time GDP contracted was in the December quarter of 2008, at the height of the global financial crisis. The first-quarter decline was the biggest fall since the March quarter of 1991, when the economy shrank 1.3 per cent'.

Henry likens Australia's problems to those of the (vastly larger) EU.

Weak profits signal weak economy, 31/5.

'COMPANY profits weakened unexpectedly in the first quarter of 2011, increasing the risk the economy contracted sharply and likely allowing the Reserve Bank of Australia more time to hold off raising interest rates.

'Company gross operating profits fell 2.0 per cent to a seasonally adjusted $63.53 billion in the first quarter from the previous quarter, the Australian Bureau of Statistics said today. Economists expected a 1.8 per cent rise on quarter'.

Big business fears downturn, 17/5.

Big business warns of major non-resource downturn to come.

This is inevitable, comrades, though much of the services sector is booming and other businesses servicing the resource sector.

Even if the Reserve Bank was swayed by this argument, letting the overall economy rip to minimise the pain for the sectors that have to downsize as resources upsizes is no panacea.

There are many indicators of wages pressure.  Home grown inflation on top of the imported inflation we are already suffering will do great damage, and the Reserve has procrastinated enough already.

Yesterday the ABS released figures on the actual cost of living increases which have risen by almost 5 % for workers and over 4 % for pensioners in the past year.

Will the bruvvers and sisters agree to wage hikes within the RBA's 'target zone' of 2 to 3 % for 'underlying' inflation.

Sorry comrades, they'll be in for their chop

Gor Blimey, $A1 to reach $US1.70! says expert, 9/5.

The inimitable Mike Smith has said the Aussie dollar resume its rise beyond. Henry when the dollar was US$1.05 thought he was being brave in predictinng $US1.20. But a visiting expert has upped the ante, as reported by Tim Boreham.

'Global currency expert Savvas Savouri, of the British-based Toscafund hedge fund, went a step further, predicting the greenback would be relegated to a "museum", as China reluctantly moved to upwardly revalue its own currency, the yuan.

'Combined with ongoing commodities demand and Australia's relatively high interest rate settings, this meant the dollar "promises to enjoy one of the most impressive bouts of appreciation of any currency within the G20 (industrial nations) and indeed beyond".

Dr Savouri, in Sydney for a conference, predicts the dollar will reach $US1.30 by 2013 -- and $US1.70 by 2014, as the greenback relinquishes its "exorbitant privilege" as the world's default currency. "The simple fact is the appreciation of the Australian dollar will be extraordinary," Dr Savouri told The Australian yesterday.

"There can't be a crisis in commodities as long as economies such as China and India are gorging on them".

It won't just be the US dollar that is a museum exhibit, but also the Australian manufacturing and tourism industries.

Retail slump continues, 5/5.

'RETAIL sales were much weaker than expected in the first quarter, sending the Australian dollar to its lowest level in over a week and fuelling concerns the economy contracted sharply last quarter.

'Economists said the size of the fall shows the impact of devastating floods in Queensland in January and a massive storm in February severely consumer demand.

'At 29-year highs, the Australian dollar is also fuelling a trend toward internet shopping.

'Higher oil prices and earthquakes in New Zealand and Japan likely further dented the mood of consumers, they said.

'The data will also give the Reserve Bank of Australia more time to consider when to next raise interest rate increase, despite first quarter inflation rising by more than expected, economists said.

'Retail sales fell 0.5 per cent to a seasonally adjusted $20.46 billion in March from $20.55bn in February and rose from $20bn a year earlier, the Australian Bureau of Statistics said today. Economists expected a 0.5 per cent rise in sales for March'.

Questions for gov'ner Glenn, 3/5.

Henry's Blog today asks 5 questions that should be asked by members of the board at today's meeting in the Reserve Bank.

Help comes from Michael Stutchbury on the question of Australia's fiscal policy - clearly far too easy for the restart of the greatest mining boom in history.

'WAYNE Swan complains that the soaring dollar is blowing out his budget deficit by crunching non-mining company profits.

'But the more fundamental story is that Canberra's structural budget weakness is helping to drive the Australian currency to its new post-float high of $US1.10'.

NAB’s Quarterly SME Business Survey – March quarter 2011, 3/5.

'SME business conditions battered by floods
• SME business confidence (seasonally adjusted) rose in the March quarter, as the worst of the flood impacts receded. The boost to confidence more than offset a decline in the previous quarter, with confidence levels now more in line with larger businesses in the NAB Quarterly Business Survey. Business conditions softened notably in the March quarter, and remain closely aligned with larger businesses, though this may in part reflect seasonality. The weakness in SME business conditions was reflected in relatively soft cash flows.
• Property, wholesale, transport & utilities and manufacturing all reported an improvement in business confidence, while confidence deteriorated in construction and health. With the exception of health, confidence levels are now positive across all industries, and are strongest in property and transport & utilities. Confidence levels increased across all major States. Confidence remained strongest in WA and Victoria, and was positive across the remaining States.
• Transport & utilities and accommodation recorded the largest declines in business conditions, while conditions improved in health. Conditions were strongest in business services, and weakest in construction and retail. Conditions deteriorated across all major States except SA. Conditions in Queensland fell sharply, reflecting post-flood weakness, where they were also the weakest. Conditions were strongest in Victoria.
• Business confidence levels rose, and were broadly similar across all SMEs in the quarter, with confidence improving most solidly for low (turnover between $2-3m p.a.) and mid ($3-5m p.a.) tier firms. Business conditions deteriorated sharply for low and high ($5-10m p.a.) tier firms, driven by broad-based declines in trading, profitability and (to a lesser extent) employment conditions, while conditions for mid tier firms improved a little.
• Cash flow deteriorated in construction, transport & utilities, finance and manufacturing, while it improved in property and accommodation. All major States recorded an improvement in cash flow, with the exception of SA, where it improved solidly.
• Employers see borrowing costs, declining demand, finding suitable labour, taxation/government policy and cash flow as the most significant issues in making longer-term decisions'.

Save more, says profligate IMF, 30/4.

Like Joseph in ancient Eygpt, the IMF has advised we Australians to consider saving far more of the resource boom against the near certainty of its ending.

Quite right, of course.  The lesson of history is that every boom ends in a bust, and the bigger the boom, the bigger the bust. Our biggest boom is cranking up and the RBA, having again been caught short, will be wrnging hands with the board on Tuesday.

'Nonsense' says Treasurer and acting Prime minister Wyne Swan. Superannuation will do the job, along with an eventual return to a balanced budget.  This is far too little, Mr Swan, but I don't expect you will see the bleeding obvious until it is far too late.

The 'engame' - implications for Australia, 20/4.

ABC Chief Maurice Newman recently concluded: '... we are nearing the endgame, which I put at no more than eight years away, possibly less. That day will arrive because policy failures, rising social costs and the action of markets will create a crisis which makes a fundamental international settlement inescapable. Global imbalances and the renegotiation of private and public contracts in countries where these cannot be honoured will have to be comprehensively addressed. The event will trigger widespread trade and capital market dislocation, the aftermath of which will see the economically stronger BRIC countries with enhanced authority at the G20 and the IMF. Australia, Canada and Korea may well be beneficiaries.

... Australia needs 'policies which improve the competitiveness of the Australian economy. We need to bring the budget back to structural balance. All new taxes must be avoided and our complex tax laws should be reformed. Our trade practices laws need to more properly balance the real world of scale and international competition. We also need to rethink IR flexibility. Finally, well-intentioned policies to the contrary, we must maintain our comparative advantage in cheap energy'.

More here.

Wal King's results blues, 11/4.

'BARELY a year after announcing a record profit, Leighton Holdings has swung to a massive loss and will undertake a capital raising for $757 million as it booked almost $1 billion in writedowns on major projects.

'Leighton had previously forecast a full-year net profit of $480m, but is now expected to sink to a loss of $427m due mainly to further cost blowouts at the Brisbane Airport Link project where it is the lead contractor.

'The troubled road project had previously suffered cost overruns of $85m but Leighton now says it will record a $430m pre-tax loss on the project.

'The nation's largest contractor will launch a fully underwritten 1-for-9 accelerated renouncable entitlement offer at $22.50 a share to bolster its balance sheet.

'The price is a hefty 22.3 per cent discount to its last traded price of $28.94'.

Gillard government's budget blues, 11/4.

There has been more government huffing and puffing (h&p) about the 'tough' budget to come.

Also much business h&p about why their sector/company needs relief from the great big new carbon tax, most recently Woodside and the LNG sector. 

Business essentially relies on the undesirability of them becoming uncompetitive, and this will be a potent economic and therefore political argument.

We have known for some time that defence spending is bedevilled by massive cost overruns, in the next generation 'Joint Strike fighter' especially.  How do budget cuts help address US cost overruns or even the cultural problems that have so sickened most parents of girls in the past week?

Then there is the inability of NBN Co to get on with the rollout of new, fast broadband cable because of the virtual certainty that costs will greatly exceed a greatly bloated budget.  Possibly abandoning the NBN could be part of a 'tough' budget.

If the budget ain't 'tough' there will be inflation, even if the RBA then does the prudent thing and hits the government in the eye with a dead fish, correction, raises interest rates.

Seat belts should be fastened as the political and economic chaos keeps escalating.

Strong jobs growth masks underlying weakness, 8/4.

'THE mining boom is masking the state of the real economy, with weakness becoming entrenched in key sectors such as retail, housing and construction' reports David Uren.

'The growth in employment, which yesterday pushed the March jobless rate below 5 per cent, is concentrated in a handful of industries, several of which have little to do with the overall health of the economy.

'Treasury's joint economic forecasting group has distributed its preliminary budget estimates and is understood to be forecasting growth in 2011-12 of close to 4 per cent. However, the first three months of the year could dip into negative territory, with coal exports decimated by natural disasters, and the economic rebound required to give the government a chance of returning the budget to surplus in two years remains highly uncertain.

"The economy is so patchy, with sectors and states in trouble now, but others expected to be very strong," says Deloitte Access Economics director Chris Richardson. "The key question is timing. Do the slings and arrows of the moment pass or do they linger into 2012-13?"

Village goes to China, 8/4.

'FRESH from pocketing $145 million from the sale of its stake in radio company Austereo Group, Village Roadshow has begun talking to investors in Hong Kong about a $300m listing of its film production and music division.

'Village chairman Robert Kirby and Greg Basser, chief executive of Village Roadshow Entertainment Group (VREG), held a series of investor briefings in Hong Kong last week. They were accompanied by advisers from UBS and JPMorgan.

'The business, which is understood to have generated about $250m in earnings before interest, tax, depreciation and amortisation last year, is likely to be valued at an enterprise value/EBITDA multiple of between six and eight times. That includes between $500m and $600m of equity and $1 billion of debt.

'Village owns 40.4 per cent of VREG, consisting of Village Roadshow Pictures and Concord Music Group, which generates about 10 per cent of the division's revenue. Village Roadshow Pictures, a joint venture with US partners Crescent Entertainment, co-produces films with Warner Bros and owns the right to distribute them outside of the US. The business is mounting a bigger push into China, seeking to co-produce with local companies such as the China Film Co-Production Corporation, which was one of the producers behind the hugely successful martial arts film Crouching Tiger, Hidden Dragon. The aim is to effectively build up a library of Chinese language films and tap into a royalty stream from television screenings of the movies.

'This move into China is understood to be a big part of the rationale for a Hong Kong listing of VREG. The plan is for Village to retain its 40.4 per cent stake in the company after the float.

'Other shareholders, including Hollywood producer Norman Lear's Crescent Entertainment, Lambert Entertainment and private equity groups Tailwind Capital Partners and Clarity Partners, are expected to be diluted through the raising.

'Village said last month it might as part of a potential listing inject a further $20m to $30m of equity into VREG, which is scheduled to release Happy Feet 2 and Sherlock Holmes 2 at the end of the year'.

NBN project on the brink as costs blow out, 7/4.

'CONSTRUCTION companies pitching to build Labor's National Broadband Network say the cost of capital works for the mammoth project could surge more than 50 per cent above forecasts to as much as $20 billion unless the NBN Co drastically revamps its bungled tender process.

'The warning came as two companies shortlisted by the NBN Co told The Australian the network builder must significantly take on more risk and liability if it is ever to complete the project within its total $36bn budget. "We found the terms of the bids very onerous in that it was a total transfer of risk to the contractors," said an executive who declined to be named as his company performs other work for government agencies. "They need more sensible risk-sharing to get prices down".'

This story comes a day or so after the resignation of a highly regarded 'can do' man from the NBN's senior executive team.

The smartest think the Gillard government could do is to can this costly white elephant.  If they blunder on, the overruns and mismanagement will make the managers of the pink batts affair look competent.

Mining boom fuels wages surge, 2/4. 

Michael Heath and Jason Scott have nicely pulled together data on wage demands in Australia's full-employment economy.

* Wages grew 3.9 per cent in the three months to December 31 from a year earlier, the fastest pace since the first quarter of 2009, according to government figures.

* ''Guys that were asking for $150,000 in November are asking for $180,000 and getting it,'' said Damien Lee, general manager of Professional Recruitment Australia, which supplies workers to companies including Woodside Petroleum, Leighton Contractors and Royal Dutch Shell.

* In February, the Construction, Forestry, Mining and Energy Union, Australia's biggest in the building industry, sought pay increases of up to 24 per cent over four years.

* The Communications, Electrical and Plumbers Union is seeking annual pay rises of 5 per cent over the next three years, almost double the inflation rate.

* The Reserve Bank has had a threshold of about 4.5 per cent for wage growth - a combination of 2 per cent productivity and the 2.5 per cent midpoint of the central bank's inflation target range, according to Stephen Roberts, a senior economist at Nomura Australia in Sydney. That limit now was probably 4 per cent or lower, as productivity slowed to less than 1 per cent, he said.

* ''For industries like construction, incentives to move to mining sites will increase and put pressure on wages in capital cities,'' Roberts said.

Bottom line: inflation is set to exceed the RBA's target range and interest rates will need to rise further far sooner than market participents and most economists now believe.