Friday, October 31, 2008

"No economist can explain what's happening"

Michael Blythe at the Commonwealth Bank:

"Forecasters are taking the axe to their growth projections for the Australian economy. Some commentators have gone as far as putting a recession as the base case. We have been down this path before. In the current climate it is easy to see why. Some of the major economies are slipping into recession. The financial turmoil continues. Extreme policy measures are being put in place. Business and consumer confidence has collapsed.

No economist can explain how stock markets can trade through a 1,000 point trading range in a day. Or how currencies can move through a 5-6c trading range in a day. These moves have nothing to do with the economic fundamentals.

But the fundamentals do matter. And when you run through the fundamentals relevant to the Australian economy they suggest we are better placed than most to deal with the global negatives... The economy will grow somewhere in the low 2’s over the next year or so. Unemployment will rise as a result. But inflation will slow. It may be a weakish result by our standards. But it is not a recession. And it will look pretty good relative to many other economies."

And Craig James at CommSec:

"The number of people filing for unemployment benefits in Australia hit record lows in September. Didn’t hear about it? That’s because the media chose not to report it. The data released by the Department of Education, Employment and Workplace Relations last week showed that there were just under 284,000 people claiming unemployment benefits – the lowest level in a data series going back over 20 years."

HT: For more pictures like the one here, check out the Brokers With Hands On Their Faces Blog - really!

Drought assistance is wrong and done badly

So says the Productivity Commission in a new report. Hallelujah!

The summary is
well worth reading.

Existing drought assistance measures would be swept away and no new areas drought declared under a radical new plan prepared for government that would replace drought assistance with a Centrelink payment set at the level of the dole.

The recommendation forms the centrepiece of a draft Productivity Commission report that finds the existing measures encourage dependence and are beyond public scrutiny.

The Commission says that weeks before the 2007 election the Howard government declared 14 areas eligible for interim drought assistance without receiving applications from the communities or state governments concerned.

Despite “stringent criteria” that limit the declaration of exceptional circumstances drought assistance to areas to those suffering from a once in 20 to 25 year drought “as at June 2008, more than half of the country was declared and some areas had been declared for 13 of the past 16 years”.

“When compared with rainfall records, it would appear that a generous interpretation of the criteria, rather than protracted low rainfall, is mainly responsible for such widespread declarations,” the Commission says...

It notes that the Coalition lifted the maximum drought interest rate subsidy payable over 5 years from $300,000 to $500,000 in 2006 and then a year later ahead of the 2007 election lifted it again to $700,000.

It finds that the entire process “lacks transparency” and that deciding who is and who is not eligible for assistance on the basis “lines on maps” is “divisive within and between communities”.

It quotes farmers who have written to it saying that the process promotes “worst practice farming, ie to overgraze and overspend in good times, knowing the criteria for subsidy will be met in the drought.”

The draft report proposes ending all drought-specific assistance schemes from mid 2009 and replacing them with assistance available to all farmers in difficulty set at the level of the dole and delivered through Centrelink rather than agricultural departments.

The payment would be subject to an assets cap, more generous than that applying to NewStart recipients and would be conditional on the farmers seeking independent financial advice about the viability of their business and developing and carrying out an action plan to improve their self-reliance.

Their eligibility for the plan would be reviewed every six months.

No farmer would be able to stay on the plan for more than 3 years out of 7.

No new areas would be drought declared and all existing declarations would end on June 30, 2010.

The National Party’s agriculture spokesman John Cobb described parts of the report as “garbage” and said that “not even the best farmers” could have prepared for the current

“No-one would miss the Productivity Commission but people would miss the cheap, clean, environmental friendly and safe food provided by the worlds’ best farmers,” the Shadow Minister declared.

The National Farmers Federation said it supported the idea of moving the criteria for farm support away from drought but that the Productivity Commission appeared to be putting nothing in its place.

“The Commission didn’t even support HECS-style loans,” said the Federation’s President David Crombie. “Does it want to remove every support other than time-limited income assistance and support for R&D and training?”

The Commission has asked for comment on its draft report and will deliver the final version to the government in February.

Now even the Reserve Bank is using the 'R' word

A senior Reserve Bank official has conceded that Australia may be unable to escape falling into a worldwide recession as the Prime Minister has called on Australia’s banks to support troubled market-linked funds.

The Reserve Bank’s Deputy Governor Ric Battelino told a bankruptcy conference that while it was true that Australia managed to sidestep the 2001 global recession, the question now was, “can it do it again?”

While he said that while that was what “we are aiming for” and that there was “nothing in the data to date to suggest we are off track” Australia was being buffeted by powerful forces and that it was “unclear” what the net effect would be.

The statement, also contained in the printed version of the speech distributed by the Bank, is its first public acknowledgment that Australia might well fall into a recession. Previously the Bank has only referred to outcomes such as “a deeper and more persistent slowing in the economy”...

It follows forecasts by JP Morgan and Deutsche Bank of negative economic growth in the current quarter and forecasts by Westpac and JP Morgan of negative or zero growth in the following quarter.

The Prime Minister rejected talk of a recession, telling Fairfax radio that the most recent forecasts in front of him continued “to have positive economic growth into 2009”.

Speaking to the Business Council Mr Rudd called on Australia’s banks to consider advancing money to more-troubled financial institutions.

“The banks are the beneficiaries of banking licences, and the Government’s guarantee on deposits and wholesale funding, the Prime Minister said.

“It is not unreasonable, therefore, to expect that the banks will play a continuing role in supporting the wider financial system and thus the Australian national interest.”

He has asked has asked the Chairman of the Future Fund David Murray, a former head of the Commonwealth Bank, to work with the Treasury in its dealings with distressed institutions.

In another development the Reserve Bank Deputy Governor warned that there were limits as to how far the Reserve Bank would cut interest rates in order to avoid a recession.

“The task of managing the economy this time will be more difficult than in [the global recession of] 2001 because we are starting with bigger inflation,” he said, adding that “this could limit room for manoeuvre on monetary policy”.

Financial markets took his comments to mean that a November rate cut of more than 0.50 percentage points was less likely than they had believed. Futures traders cut the implied probability of a 0.75 points cut from 94% to 77%, however they were still pricing in a 100% likelihood of a 0.50 points cut.

Mr Battellino also explained that there was no “line in the sand” beyond which the Bank would stop supporting trade in the Australian dollar, a remark that helped push up the Australian dollar 0.70 US cents as he spoke.

He said that rather than attempting to maintain any particular price, the Bank was buying Australian dollars where needed to ensure that the market remained liquid.


Thursday, October 30, 2008

Bread. It's getting pricey

If you’ve noticed Melbourne bread becoming more expensive, you’re not alone.

The Bureau of Statistics records the price of bread in each Australian city every three months in order to calculate the consumer price index.

It says that bread is now more expensive in Melbourne than in any other Australian city, including Darwin.

The price of a Melbourne sliced white loaf has climbed from $3.36 to $3.73 over the last year – a jump of 11 per cent.

Chocolate, rump steak, frozen peas and baby food are also more expensive in Melbourne than in any other city, with their prices here climbing faster than the overall rate of inflation.

The news suggests that a recession has yet to reach Melbourne shopkeepers...

Even for products for which the Melbourne price wasn’t the highest, it was often a good deal higher than the price in Sydney.

The Bureau says its shadow shoppers priced potatoes at $2.47 per kilogram in Melbourne in the September quarter compared to only $1.57 in Sydney.

It surveys a variety of shops at a number of different times in order to ensure that the prices it collects are representative.

Milk, cheese, eggs, sugar, jam and instant coffee were all more expensive in Melbourne than in Sydney, with Melbourne’s teabags the most expensive surveyed.

Alcohol was consistently more expensive in Melbourne than in Sydney, with draft full strength beer at a pub costing $3.47 in the southern capital compared to $2.92 north of the Murray.

Only for some cuts of meat was Melbourne relatively cheap, with its loin chops, beef sausages and lamb the cheapest of all the capitals.

Adding all of the Melbourne prices published by the Bureau to create a virtual “shopping trolley”, Commonwealth Securities has totalled the price at $148 in the September quarter, up from $132 three years earlier. But it says because Victoria’s after-tax average wage climbed even faster, Victorians are still slightly ahead.

In the September quarter this year Victoria’s after-tax weekly wage of $906.8 bought a total of 6 trolleys, roughly the same as did Victoria’s after-tax weekly wage of $783.26 three years ago.

“Overall, the average consumer can fit a little more in their
shopping trolley without taking a greater chunk out of the weekly pay packet,” said CommSec’s Craig James, conceding that the gain wasn’t much. “About equivalent of an extra carton of eggs. Not a huge improvement power, but still a gain,” he said.

So, we'll grow "below average"

Here's how the Reserve Bank's Deputy Governor Ric Battellino talked about the prospect at a conference in Adelaide this morning (with what I interpret as another dig at the Coalition's "go for growth" slogan):

"Many people will be disappointed and unhappy with a year or two of below-average economic performance. But the truth is that the economy cannot always grow above average and it certainly cannot maintain the pace of the past five years. If we attempted to make it do so, we would be repeating the mistakes of our predecessors in the 1960s, whose attempts to maintain a never-ending boom laid the foundations for the subsequent two decades of severe economic difficulties."

The 'R' word. It's baaaaack!!!

THE Australian economy is already going into reverse and could be officially in recession within months, according to alarming new assessments from leading forecasters.

In a dramatic shift of outlook, investment bank JP Morgan yesterday became the first major forecaster to say the economy will contract in this quarter and the next — satisfying one of the most common definitions of recession.

The firm sent its gloomy forecast to clients early yesterday. Within hours, another forecaster, Deutsche Bank, revealed it was also expecting the economy to contract in the current quarter despite the Government's $10.4 billion economic stimulus package, much of which will hit consumers' pockets in December.

JP Morgan Australia chief economist Stephen Walters told The Age he did not expect the fiscal stimulus package to have much impact...

“I will cushion the down side, but I don’t think the fiscal stimulus package will be that significant,” he said.

“I think it’s important for confidence that the government is seen to be doing the right thing, but the way consumers are feeling right now with recession levels of confidence, with equity markets having fallen 40%, with funds frozen all over the country, with concerns about the stability of the banks, with global recession having kicked in, with consumers now worried about their job prospects, why would you rush out and spent $1,000 that the government sends out in a nice little cheque to you?”

“As much as 40% of Australia’s spending is done by the top 20% of income earners. It’s their behaviour that matters the most, and they won’t be getting cheques.”

Mr Walters expects Australia’s GDP to slide by 0.3% during the current quarter and by 0.4% in the following quarter.

“As recessions go, that’s fairly mild. In the quarter after that we have growth of 0.6% and its positive thereafter, so this is not like the early 1990s recession which was stretched over 5 quarters with more than a year of negative GDP growth.

While not explicitly forecasting a recession, other forecasters spoken to by The Age foresaw similar developments.

“That forecast is not too far from consensus,” said Professor Philip Adams, an economic modeller who runs the Centre for Policy Studies at Monash University. “Whether growth is positive or negative, it’ll be pretty low.”

Westpac’s chief economist Bill Evans said he regarded negative economic growth during the current December quarter as “very, very unlikely”.

“You would have to assume that people aren’t going to spend much at all of the fiscal stimulus package, and we think 40% of it will be spent. We are expecting economy to grow in the December quarter, but after that we are expecting zero growth in the March quarter and then only very small growth as the effect of the stimulus dies away.”

Asked whether that could mean a technical recession in the first half of next year, Dr Evans replied that it might, but only by using a very technical definition.

“Growth will be low, no doubt about that,” said the National Australia Bank’s chief economist Alan Oster. “We don’t think it will be a recession, but it might feel like one.”

The government will release its forecasts in the Treasury’s Mid year Economic and Financial Review next month.

Wednesday, October 29, 2008

Very little economic growth, especially in Victoria

That's how the NAB sees things - and it's bad news

Business conditions in Victoria have plunged since June making the state the worst place to do business in mainland Australia - a distinction the state has grabbed from NSW.

The National Australia Bank quarterly business survey finds that conditions in Victoria moved from being clearly positive to clearly negative in the three months to September, the only state apart from Tasmania to experience such a plunge.

Victorian conditions are now their worst since 2001.

Businesses in Victoria are also the least confident in the nation about the three months ahead, apart from those in South Australia.

The National Australia Bank says that in the past changes in confidence about the future have been a good guide to changes in actual conditions, suggesting that Victorian conditions are about to worsen further...

The state Opposition leader Ted Baillieu seized on the finding saying that the Premier John Brumby had “not only failed to support the manufacturing industry, but has also sent our economy down the wrong path by seeking to make it reliant on the finance and trade services sectors”.

Conditions among manufacturing businesses were the worst of any sector nationwide, with conditions in the retail, wholesale and finance sectors also sharply negative.

Trading conditions, export sales and forward orders all fell sharply over the 3 months to September. Retail margins were falling as the costs faced by businesses rose sharply driven by higher oil prices and a lower dollar. Average hours worked remained broadly stable while employers wound back their plans for further hiring. They also Investment plans were also reigned in.

On the basis of the survey the Bank's chief economist Alan Oster has wound back his forecast for economic growth next year to just 1.25%. Excluding mining and agriculture, the Australian economy would scarcely grow.

“Our forecasts imply that the rest of the economy will slow to growth rates of less than 0.50% over the next year or more,” Mr Oster said.

“Employment growth should slow pushing the unemployment rate toward 6% by late next year and beyond it in 2010.”

Asked about his forecasts the Opposition Leader Malcolm Turnbull was less downbeat, saying Australian would “certainly” avoid a recession.

“Growth will slow next year. The estimates that are around say that our economy will grow at about 2%. I think most people feel it will be less than that. I don’t think the Government would have been spending $10 billion a few weeks before Christmas if they thought growth was going to be 2%. But I don’t think it’s going to go negative,” he said.

The Prime Minister told a business dinner that even when markets began to stabilise, the impact of the global financial crisis on Australia's real economy in would be “felt into the future on jobs and on growth”.

The NAB is forecasting recessions in the US, Japan, the UK and Europe, with sharply slowing growth in the rest of the world. It expects Australia's terms of trade to collapse 30%.

Victorian businesses expect to perform the worst in the nation in the during the year, edging out NSW for the honour.

Western Australian businesses remain the most optimistic.

Tuesday, October 28, 2008

The ever-evolving guarantee

Our Treasury is working 24/7

Deutsche Bank have just provided the following update:

"In a data flash published this morning we noted that the statement on the design and operational parameters of the deposit and wholesale funding guarantee had been removed from the Treasury's website. We speculated that there could be some amendments to the design of the guarantee. The design and operational parameters have been reinstated on the Treasury's website.

There is one substantive change from the policy as previously stated and some clearer wording on another aspect.

- The substantive change is the removal of the earlier wording that "until that date [28 November 2008] the guarantees will not be available to foreign bank branches." We take the specific removal of this statement to mean that foreign bank branches (FBBs) will be covered by the guarantee from today. That is, deposits and wholesale funding eligible for the guarantee arrangements will be covered from now.

- In terms of wording, the statement makes it clearer that the $1 million fee-free threshold "applies per depositor per institution." Thus there is explicit recognition that "all types of legal entities" will be able to split their funds across multiple Authorised Deposit Taking Institutions in order to gain access to multiple fee-free thresholds.

- In our view the ability to do this could seriously undermine the intent of the threshold, which is "reduce the incentive to move funds from the short term money market into deposits." As we move into an environment of a low cash rate the incentive to avoid the fee will grow and the large number of ADIs could see money market funds make a concerted effort to spread their cash around. If this occurs then it will seriously impact on the ability of non-bank issuers to raise funding from money market funds. We think a better policy option would have been to impose a `system' cap of $1 million on the fee-free threshold. We don't think it would have been too difficult to ensure self-regulation of this requirement, certainly for the wholesale industry."

Also tonight the Treasurer has provided more money for APRA, ASIC and the Treasury. Thank goodness...

"Today the Rudd Government is announcing additional funding for the Australian Prudential Regulation Authority (APRA), the Australian Securities and Investments Commission (ASIC) and the Department of the Treasury.

This will ensure that our regulators continue to have the resources they need to maintain the strength of Australia’s financial system during the global financial crisis.

Australia’s regulators are first class and these measures will ensure that the Australian people can continue to have absolute confidence in the performance of our regulators during the global financial crisis.

Our regulators have stepped up their monitoring and other activities as the global financial turmoil has unfolded. This has been critical in ensuring the strength of Australia’s financial system, in the face of the most significant upheaval in global financial markets since the Great Depression.

The intensification of the global financial crisis over recent weeks has resulted in a greatly increased workload for our regulators. This additional funding will ensure that the regulators continue to have sufficient resources to fulfil their roles in light of global developments.

The additional funding to APRA will also enable it to respond to applications from entities seeking to become authorised deposit-taking institutions (ADIs), where they are able to meet Australia’s prudential regulatory requirements.

As ADIs these entities would be able to take deposits and would be eligible for the Government guarantee on deposits.

The additional funding totals $83 million over four years with $21.5 million in 2008-09, $43.5 million in 2009-10, $9 million in 2010-11 and $9 million in 2011-12.
Of this additional funding, APRA will receive $9 million in 2008-09 and $18.5 million in 2009-10, and $9 million in each of 2010-11 and 2011-12 to enable it to manage the effects of the global financial crisis.

This funding will be provided from the Budget, rather than being recovered from levies on the financial sector. These arrangements will be reviewed in the 2009-10 Budget context and in light of developments in global financial markets.

Of the additional funding, ASIC will receive $10 million in 2008-09 and $20 million in 2009-10 to help it manage the domestic and international implications arising from the global financial crisis.

This funding will provide ASIC with additional ‘front-line’ resources for market monitoring and enforcement activities to further strengthen confidence in Australia’s financial markets.

Of the additional funding, Treasury will receive funding of $2.5 million in 2008-09 and $5 million in 2009-10 to ensure Australia’s regulatory environment continues to be world’s best practice and to pursue reform of the global financial architecture, through the G20 and other international forums.

The Government will ensure our regulators remain appropriately resourced throughout the global financial crisis and will continue to review funding requirements as the crisis unfolds."


It's out - the much awaited Ken Henry Hansard

Read it here.

Gasp as the Treasury Secretary tells a Coalition Senator that Australia's national newspaper has taken her for a ride:

Senator COONAN — On 13 October, Mr Rudd said, in referring to the package: ‘This measure has been recommended to the government by the Australian regulators—the Reserve Bank, the Prudential Regulatory Authority and the Treasury.’ Is that an accurate summation?

Dr Henry — Yes it is, Senator.

Tremble as as a Coalition Senator accuses the Treasury Secretary of lying:

Senator ABETZ — So the two of you [Henry and Reserve Bank Governor Stevens] were of like mind?

Dr Henry — I have already said that.

Senator ABETZ — and said ‘jinx’ each time you opened your mouth: ‘Exactly what I was going to recommend to the government.’ That, to me, does not sound to have the ring of truth about it.

Dr Henry — Excuse me, Senator. What are you suggesting?

Wonder about the Coalition as it relies again and again on one single unsourced news report to source its questions...

Senator COONAN - You have seen a front page article in the Australian yesterday, which I think you mentioned a little earlier, which stated, and I quote: 'The Government ignored the RBA’s strongly voiced concerns about the impact of an unlimited guarantee scheme in its rush to announce a guarantee of all deposits in Australian deposit-taking institutions on October 12.'

Dr Henry — I have seen that article and I have already indicated that that article is just plain wrong—and it is not helpful.

Senator COONAN — I am sure it is not helpful, but it may be right.

Dr Henry — Members of the committee may think that it is a matter of some mirth, but can I just say to the committee... that the Australian newspaper has not handled these issues particularly well.

Become restive as the Coalition digs even deeper, asking the same question on high rotation: Did the RBA and the Treasury differ in the leadup to October 12?

Dr Henry — Senator, I have answered that question on numerous occasions this morning and my answer consistently has been no.

Senator COONAN — Neither in writing nor orally?

Dr Henry — That is correct, Senator.

Senator COONAN — Right.

Dr Henry — That is to say, and I will say it again, the story on the front page of yesterday’s
Australian newspaper was wrong — that is W-R-O-N-G! That is for the benefit of Hansard.

Senate committees usually do truly great work. But not always. See for yourself.

Perhaps the funds should ramp up their advertising...


The way out of the mess some say the government created

(I am not one of them)

More managed funds are suspending redemptions every few hours. One of the latest, Colonial First State is actually owned by a bank.

If I was advising the government, I'd tell it to do nothing other than help people put out by the suspensions.

The market-linked funds had a business model that was always going to go south when times got tough. Guaranteeing money in the bank is what matters.

This morning in the Age Tim Colebatch takes a different view:

"Australia cannot afford mistakes in economic policy. Kevin Rudd made one with his hasty, sweeping pledge to guarantee all bank deposits for three years. That mistake was understandable in the circumstances, but the Government's failure since to admit it and fix it is inexcusable.

Let's be clear about what happened. Rudd's aim was to avert a potential threat to the banks; instead, he overdid it, and created a real crisis for the non-banks. The reason 14 of the 20 biggest mortgage funds have now frozen their deposits is because the Prime Minister - with the Treasurer away in Washington, and without even talking to the heads of the Reserve Bank and the Australian Prudential Regulation Authority - dramatically tilted the playing field against them.

The Government had to concede its mistake and back down. Instead, on Friday it dug itself deeper into trouble by reaffirming that any bank account holding up to $1 million would be guaranteed free of charge. The threshold is so high as to be meaningless. Rudd is either getting bad advice, or not listening.

There is only one way out, which Kevin Rudd in opposition did very well: eat humble pie, admit error, fix it, and move on."

In The Australian Michael Stutchbury wants the government to:

"Impose a fee on all guaranteed deposits, not just those above $1 million. And make the guarantee optional for authorised banks, building societies and credit unions."

And on Radio National this morning David Murray, the Chairman of the Future Fund and the former head of the Commonwealth Bank said that he wanted the government to effectively end the bank guarantee after three years by charging (a lot) for it from then on. He also suggested that the government buy in to troubled funds.

I think none of these ideas would help much...

Ending or dramatically curtailing the governemnt guarantee of deposits as Tim Colebatch wants would send a confused message. Everyone knows that bank deposits are effectively guaranteed by the government. Saying that they are not guaranteed when people know that they are would do little to change behaviour, other than adding (somewhat) to fear and uncertainty.

Imposing a fee on all deposits in return for a guarantee as Michael Stutchbury wants would depress economic activity at a time when we need to support it. And the government might say that small depositors who don't pay the fee will be denied protection, but they are entitled to believe they will get protection anyway. Legend has it that the economy-class passengers on the Titanic were told in advance they would not have access to life rafts, but when the ship sank they got that access anyway.

Davidd Murray's main idea pushes the same problems out three years, and does nothing to help now. His other idea - buying into market linked funds - scares me.

It seems to me that none of these ideas will stop the rout on market-linked funds... unless the government buys into them big time as Murray suggests and effectively guarantees them.

Meanwhile, the details of the government's guarantee appear to be evolving by the hour.

Deutsche Bank's David Plank emailed his clients yesterday about details the Australian Treasury had put up on its website.

This morning he has emailed:

"In a short note published yesterday afternoon we commented on the 'Design and Operational Parameters' statement published on the Treasury's website at some point on Sunday. This statement clarified some aspects of the scheme.

However, this statement has now disappeared from the Treasury's website. Instead the website says the statement has 'been archived or updated and is no longer available.'

- At this stage we have been unable to find out why the statement has been removed. When we do so we will comment on whether any of the design features are going to be changed."

Strange days indeed.

The OTHER intervention - in support of our dollar

The Australian dollar is fighting to stay above 60 US cents as the Reserve Bank and sellers do battle across three time zones.

The Reserve was late yesterday preparing to intervene strongly in both the US and UK markets in a bid to ensure that there were enough buyers to match sellers throughout the night.

It is only the Reserve Bank's second co-ordinated intervention since the plunge in 2001 that took the Aussie below 50 US cents.

The Bank began buying Australian dollars on Friday as the Aussie fell towards 62 US cents before crashing through 61 US cents on the weekend on its way to a five-year low of 60.57 cents.

By late yesterday the intervention had held the line at US61.22 cents. Against Japan the Aussie remained near its all-time, buying just 57.37 yen.

The Reserve is at pains to stress that it is not trying to support the Aussie at any particular level.

"What we are doing is providing liquidity to an illiquid market," said a Bank spokesman.

Without the Reserve Bank's intervention many traders who want to sell Australian dollars would be unable to find buyers, effectively closing the Australian dollar market or resulting big step-downs in price...

"What's happening now is different to earlier episodes," said an official source familiar with the intervention.

"In 1998 and in 2001 there were people taking big positions against the Aussie. That's not what's happening. There's no-one out there trying to punt the Aussie lower."

"People are selling because they have to, in order to get access to other currencies. Or they might be liquidating a whole book, some of which will have Aussie in it."

"In fact if you talk to most people out there, they all think the Aussie has overshot. But they don't have the money to put on the other side buy it."

The Reserve Bank is dipping into its reserves of around $40 billion to support the Aussie dollar. Around $25 billion of these are in the form of foreign currencies.

The St George Bank has downgraded its forecast for the Australian dollar, saying it does not expect the dollar to improve until the middle of next year.

The Commonwealth Bank's foreign exchange chief Richard Grace is more pessimistic, saying that the Aussie could well revisit its all-time low of 49 US cents and that there are risks it fall even further.

"Investors are seeing the Aussie as a 'proxy' for world growth," said St George chief economist Besa Deda.

"As well China is one of Australia's key trading partners and there are increasing signs that its economy is slowing. Those worries have spurred selling on commodity markets. This too is pushing the Aussie lower."

Funds manager Stephen Miller at Blackstone Inc said while the Aussie was clearly headed down over the medium term, it might bounce, "quite strongly" before the end of this year.

"Traders are selling the Aussie first because they can. It is a more liquid market than that for currencies such as the New Zealand dollar. As they adjust holdings, the Aussie might bounce, but it is still headed down."

Monday, October 27, 2008

What exactly was it that was W-R-O-N-G-! ?

If this whole W-R-O-N-G-! - R-I-G-H-T-! tit for tat between the Treasury and The Australian is beyond you, spend a minute with your friends at Media Watch to make sense of it.

They've done it for you, so I don't have to, here.

Sunday, October 26, 2008

Surely we are not in for another great depression?

History may not repeat, but it sometimes rhymes.

We might not be able to escape one, writes Professor Greg Mankiw in the weekend NYT:

"When Olivier Blanchard, the I.M.F.’s chief economist, was asked about the possibility of the world sinking into another Great Depression, he reassuringly replied that the chance was “nearly nil.” He added, “We’ve learned a few things in 80 years.”

Yes, we have. But have we learned what caused the Depression of the 1930s? Most important, have we learned enough to avoid doing the same thing again?"

Read the lot.

And also the NYT's cheat sheet: Credit Crisis — The Essentials

Have we learnt nothing about immigration?

Absolutely nothing?

Immigration helps us when the economy is weak or turning down: H-E-L-P-S.

The Coalition still doesn't get it.

Now, of all times, it is calling for our immigration intake to be cut.

Today's Sunday Age:

"AUSTRALIA'S migration intake must be immediately slashed by 25% to help cope with the global financial crisis and relieve pressure on cities and the environment, says the Federal Opposition.

Amid growing concern that Australia's unemployment rate is set to increase, Opposition immigration spokeswoman Sharman Stone said plans for a record 190,300 migrants in 2008-09 should immediately be scaled back to the 2005-06 level of 142,930."

Spare me. Has she no idea? Is she really the Opposition's specialist in immigration?

Times are serious. We need to do everything we can to BOOST the economy.

Immigration boosts the economy. The time to wind it back is when the economy is overheated. Not now.

Rory Robertson takes up the case..

"While largely unstated, maintaining Australian home prices near current levels now is a major policy priority for the RBA and Canberra. Aggressive rate cuts obviously help, so too prodding of up-to 150k first-home buyers into action.

In this context, recent reports of growing pressure to reduce our immigration intake are somewhat disturbing. Recall that, during the early-1990s recession, net immigration collapsed from 170k in 1989 to just 30k in 2003 (lowest four-quarters-ended figure), reinforcing the Australian economy's tendency to stall. From a macroeconomic perspective, cutbacks of that order this time around should be avoided like the plague.

To recap, all the important policy efforts so far are counter-cyclical in nature: in particular, the RBA's rate cuts, Canberra's timely fiscal stimulus, as well as its guaranteeing of aspects of the financial sector, its promotion of mortgage lending and the ban on "short selling" (not to mention the big market-driven drop in the A$). By contrast, reducing immigration is a pro-cyclical measure, essentially working against the policy initiatives listed above."

Saturday, October 25, 2008

Cruisin' with the Boss, Swannie

I really like this piece by the Canberra Times' Jessica Wright:

"These are strange days and so it is fitting that one of the world's economic leaders, Wayne Swan, is starting his day with a bit of Springsteen.

And 'The Boss' is wailing loud.

It is 8am and the Treasurer's parliamentary office has been in full swing for hours. The Australian stockmarket is about to begin its wild gyrations for another day.

Advisers and ministerial staff bustle about, briefs and reports are ferried from one desk to another.

Across the hall, Lindsay Tanner, the man with the job of wielding the axe over Australia's finances for the past year and who will now play nurse and administer an adrenaline injection chats with Labor heavyweight, Senator John Faulkner.

Here, with still-damp hair and clutching a mug of coffee, is Australia's man in the eye of this global economic storm...

Mr Swan rises pretty early these days.

Part of a government infamous for its early starts, he rises well before daybreak, his mind turning to lands and economies where the sun has set long after our own.

He says his routine suffers the greatest upheaval when travelling abroad.

''While I'm in Australia [it is] pre-dawn briefings about overnight developments, a quick cup of tea and a piece of toast, early morning meetings, usually breakfast television and radio engagements, and on with the day,'' he says.

''[Abroad last week] It was hard yards, but if there was ever a time for hard yards it is now.''

The Treasurer has had an almighty year in the spotlight.

Delivering Labor's first budget in 11 years and targeted by the Coalition as the ''weak link'' in cabinet, Mr Swan has been baptised at the dispatch box and, for the most part, seems to have relished it. Question time has shown the emergence of an acerbic lyricist, especially during the last months of Brendan Nelson's ill-fated stint as opposition leader and the ensuing in-party leadership tussle.

In the space of a week, Mr Swan tagged Peter Costello, Brendan Nelson and Malcolm Turnbull as the ''Three Stooges'', proclaiming then-shadow treasurer Turnbull to be ''living in cloud cuckoo land'' over the state of the Australian economy and describing the Liberals as standing ''for big oil, fast cars and Bacardi Breezers.

''It is now clear the Liberal Party is being led by [British singer] Robbie Williams''.

Fortifying rock 'n' roll for breakfast and pop star references aside, he is in a far more sober mood these days.

Mr Swan viewed first hand last week the despair and panic of the global money meltdown in the place of its birth, Wall Street.

Arriving home he declared Australia to be in the midst of the worst financial crisis to confront the modern market economy.

The trip to the United States was, he says, clarifying in its graveness, the crisis evolving before his eyes.

''My first time on Wall Street was many years ago, when the world and the global economy were far less interconnected than it is now,'' he says.

''The clear impression I got last Thursday was that the outlook was obviously very sombre, though very determined to ensure we get the reforms in place at a global level to prevent this kind of thing from happening again.''

When is it going to end?

It is a question that no one has been able to answer satisfactorily.

It is a question that Mr Swan faces daily from the media, the opposition and the public.

''It's certainly an extraordinary time for the global economy, the greatest upheaval since the Great Depression on financial markets,'' he says.

''Our job is to act decisively so we can stay ahead of the game. We ... anticipated the possibility that global conditions would get a lot worse, which is why we built such a strong surplus.

''Now that those tough times have arrived we're focused on doing everything possible to protect the economy from the worst effects of the global economic crisis.''

Time is money, and in Mr Swan's case, the adage is particularly apt. As he sweeps up papers and sets his sights on the first of many meetings for the day, The Canberra Times puts one last question.

What would ''The Boss'' have to say about all this?

Mr Swan pauses, the stereo at last silent.

''I reckon if these times were a song,'' he muses. ''It would be Thunder Road.''

Strange days indeed.


Friday, October 24, 2008

"Would you like a guarantee with that?"

It'll be an optional extra if your account is worth more than $1 million.

(I guess some will avoid it by simply splitting their bank deposits into a number of $1 million accounts.)

The Treasurer's announcement:


On 12 October 2008, the Rudd Government announced it will guarantee deposits in Australian owned banks, locally incorporated subsidiaries of foreign banks, credit unions and building societies for a period of three years. The Government also announced a guarantee on wholesale debt securities issued by these same institutions, on application, and for a fee.

I am today releasing further details of the guarantee arrangements following advice from the Council of Financial Regulators, which comprises the Reserve Bank Governor, the Secretary to the Treasury, and the Chairmen of the Australian Prudential Regulation Authority (APRA) and the Australian Securities and Investments Commission (ASIC)...

Deposit Guarantee

As I indicated when introducing the deposit guarantee legislation in the House of Representatives last week, the Government has consulted on the interaction between the guarantee on eligible wholesale borrowing and the guarantee on deposits and whether measures are needed to clarify the intersection of these guarantees and facilitate their operation.

Today the Prime Minister and I received advice from the Council of Financial Regulators and, based on the Council’s recommendations, the Government has decided that a threshold of $1 million be implemented, over which a fee will be charged to receive the benefits of the deposit guarantee.

This fee will ensure the deposit and wholesale funding guarantees apply in a consistent manner for larger investments, for which deposits and securities are interchangeable. In particular, it will ensure that the deposit guarantee does not provide disincentives for market participants to operate in short-term money markets.

The fee will apply from 28 November 2008. Up until that date all deposits and wholesale funding eligible for the guarantee arrangements will be guaranteed without charge. After that date, deposits over $1 million and wholesale funding will only be guaranteed if the relevant fee is paid.

Fee structure

The Government has accepted the Council of Financial Regulators’ advice, to adopt a single rate fee for all maturities for eligible securities up to 60 months, with a different rate applying to eligible institutions based on their credit rating (see below).

This approach will provide an appropriate set of incentives for those ADIs who choose to use the guarantee and will minimise any unintended consequences for other debt markets.

The volatility and significant uncertainty that is evident in the current market environment means that it will be necessary for the wholesale guarantee fee arrangements to be reviewed on an ongoing basis and revised if necessary.

Other investments

The current global financial crisis is one of the most substantial shocks to the global economy seen in recent history. Australia’s long-term economic fundamentals are strong. The Government believes that these strong fundamentals should underpin investment decisions.

The Rudd Government’s action of 12 October guarantees 15 million deposit accounts, covering $800 billion, and fund raising facilities of $1.2 trillion used by financial institutions to finance small business investments and home loans.

In addition, the non-prudentially regulated investment sector also plays an important role in providing finance to the Australian economy.

The non-prudentially regulated investment sector typically includes mortgage trusts, non-listed property trusts and debentures. It provides investment capital to a range of projects (e.g. property development) and offers investment returns to retail investors. These vehicles are an important form of capital for the real economy.

Concerns have been expressed by industry about the impact of the current global financial crisis on this sector.

The Secretary to the Treasury and the Chairman of the Australian Securities and Investments Commission, in consultation with other financial regulators, are currently assessing all relevant actions that might be appropriate to foster the ongoing health and vitality of individual firms in this important sector of the economy.

This involves detailed consultation with the large number of firms delivering an array of complex investment products.

The Government has requested ASIC provide urgent advice in relation to retail investor hardship cases where redemptions may have been frozen, including using its modification powers under the Corporations Act to provide additional flexibility to fund managers and trustees.

Foreign bank branches

The Government recognises the role that foreign bank branches play in the ADI sector and that they are subject to APRA’s prudential regulation framework applicable to foreign bank branches.

In light of these considerations, I am also announcing that foreign bank branches will be able to access the guarantee for short-term wholesale funding raised from Australian residents at the same premium that applies to other ADIs. Foreign bank branches will also be able to access the deposit guarantee in respect of domestic deposits held by Australian residents on the basis of the fee schedule, but with no fee-free threshold. This arrangement will be subject to strict limits and requirements to ensure the funding is used only for their Australian operations.

The past 12 months have seen conditions in global financial markets deteriorate significantly. Australians have witnessed the failure of a number of institutions overseas and we have not been immune from the impact. The Government has taken decisive action to shore up the Australian system.

Weekend reading - hundreds of tax submissions

Some of them predictable

The first batch of submissions to the Henry Review are here.

There may well be some gems among them, but here's what I wrote:

The government’s Henry Tax Review is shaping up to be a lobbyists dream.

Late yesterday the Review published more than 200 submissions on its website, and said it would post more in coming days.

The Australian Chamber of Commerce and Industry has asked for payroll tax to be scrapped and personal income tax capped at 30%.

British American Tobacco is concerned about the $2.7 billion its customers pay in tobacco excise.

Telstra wants tax concessions to encourage capital investment by business and it wants bigger research and development tax concessions.

And the Investment and Financial Services Association wants to ensure that tax does not act as a barrier to establishing Australia as an international financial services centre...

Many organisations have been given an extension of time to submit wish lists. The Review, chaired by the head of the Treasury Dr Ken Henry, will not report until December 2009.

Among those granted exemptions is the newly formed National Community Tax Forum - made up of the ACTU, Australian Council of Social Service and the Consumers' Federation. It wants the focus put on the low paid.

Forum Chair Professor Julian Disney said the tax system needed to encourage job-creating ``productive investment'', not speculation, singling out negative gearing as a tax break that favoured speculation.

Professor Disney also said there was concern about the structure of the tax rates for the low paid which can discourage them from increasing their hours. He said the tax system was ``upside down'' redistributing ``wealth to the wealthy'' through tax breaks and incentives.

ACTU secretary Jeff Lawrence said he hoped to debunk the myth that Australia was a ``high tax country''.

``It's not,'' he said. Mr Lawrence also attacked the direction of the inquiry and the ``very narrow'' range of people appointed to it. ``It would appear it is being steered in a direction, very generally, a low tax direction, a quite conservative direction.''

- with Ben Schneiders

And here's Richard Denniss of the Australia Institute on the arguments for a new, higher tax rate for very high income earners.

Westpac, St George - keeping up appearances

An odd condition attached to approval of Westpac's takeover of St George is that Westpac will be required "to maintain all Westpac and St George retail banking brands including Bank SA".

For 3 years anyway. Apparently the appearance of competition matters.

As for the reality, the Treasurer came close in his press conference last night to saying that the takeover would be pro-competitive.

"The merged entity will have a larger balance sheet and capital base, as well as broader access to funding markets, making it better placed to withstand systemic shocks. The St George banking brand will also benefit from Westpac’s lower funding costs, helping it to offer lower interest rates on loans," he told us.

I asked him whether one of the big banks should take over the Bendigo Bank in order to improve competition, using the same logic.

He said he wouldn't answer questions like that.

Conditions below:

Proposed acquisition of St George Bank Limited by Westpac Banking Corporation

After careful consideration, today I am announcing approval, with conditions, of the proposed acquisition of St George Bank Limited by the Westpac Banking Corporation under the Financial Sector (Shareholdings) Act 1998.

This decision follows a thorough assessment of its impact on the national interest, including factors such as competition, economic efficiency, prudential requirements, financial system stability, community banking needs and the impact on Westpac and St George customers and employees.

With the conditions I am imposing, this decision strikes the right balance between enhancing the competitiveness and the strength of our banking system.

This decision takes careful account of the detailed assessments of the Australian Competition and Consumer Commission (ACCC), the Australian Prudential Regulation Authority (APRA) and the Department of the Treasury.

The merged entity will have a larger balance sheet and capital base, as well as broader access to funding markets, making it better placed to withstand systemic shocks. The St George banking brand will also benefit from Westpac’s lower funding costs, helping it to offer lower interest rates on loans.

As part of the approval, I am imposing strict conditions on the acquisition to ensure the best possible outcome for both Westpac and St George customers and employees.

Under the conditions, Westpac is required to maintain the existing number of Westpac and St George branches and ATMs, including in non-urban areas; retain all Westpac and St George retail banking brands including Bank SA, maintain dedicated management teams for St George and Westpac retail banking distribution and retain a corporate presence in Kogarah. The conditions will also require the removal of foreign ATM fees for Westpac customers using St George ATMs and vice‑versa.

Approval of the proposed acquisition under the Financial Sector (Shareholdings) Act 1998 will also be conditional upon the agreement of the shareholders of St George Bank to the proposal and the endorsement of the relevant scheme of arrangement.

I am also providing my approval under the Banking Act 1959 for St George to enter into an arrangement for the disposal of its business to Westpac.

23 October 2008


The conditions to which this approval is subject are that, for a period of three years after the implementation of the proposed merger, the merged entity is required to:

. maintain (in net terms) branches and ATMs at the respective numbers existing as at the Share Scheme Implementation Date, including by maintaining (in net terms) branch and ATM numbers in areas outside of major urban centres;

. remove foreign ATM fees for Westpac customers using St George ATMs and vice‑versa;

. continue to provide a comprehensive range of affordable banking products to low-income consumers and other members of the community with special needs;

. retain all Westpac and St George retail banking brands including Bank SA;

. maintain dedicated management teams for St George and Westpac retail banking distribution; and

. retain a corporate presence in Kogarah.

In addition, for the period of integration under the merger process (the period between the Share Scheme Implementation Date and the merger of the ADIs), the merged entity is required to:

. maximise internal redeployment opportunities available for affected staff, support external job placement where employee redundancies occur, and ensure that staff affected by the merger have timely access to their full entitlements under Westpac and St George retrenchment arrangements;

. work with consumer advocates and community stakeholders to minimise community concerns about the merger and its impact on customers and the community, and address any concerns as sensitively and quickly as possible;

. work through the implications for employees as quickly and sensitively as possible, in consultation with employees, the Finance Sector Union and other affected stakeholders; and

. provide specialist resources to assist staff affected by the merger.

Force Majeure

Westpac Banking Corporation will not be liable for any failure to perform any obligation imposed by these conditions if the failure is due to Force Majeure.

If Westpac Banking Corporation is by reason of Force Majeure unable to perform an obligation under these conditions, Westpac Banking Corporation will as soon as practicable and in any event within 30 days notify the Treasurer specifying:

(a) the cause and extent of non‑performance;

(b) the date of commencement of Force Majeure;

(c) the means proposed to be adopted to remedy or abate the Force Majeure;

and will use all reasonable diligence and employ all reasonable means to remedy or abate the Force Majeure as expeditiously as possible.

Force Majeure means:

(a) any act of God;

(b) war, revolution, or any other unlawful act against public order or authority;

(c) an industrial dispute; or

(d) a governmental restraint.

Westpac Banking Corporation will give written notice to the Treasurer of the following matters as soon as practicable and in any event within 30 days after the relevant occurrence:

(a) the effective date; and

(b) the commencement and termination or abatement of the Force Majeure.

This approval remains in force indefinitely.

Thursday, October 23, 2008

Still up for grabs - almost everything about the deposit guarantee

The Treasurer and the PM reportedly met with the execs of the big banks last night to hammer things out, days after the RBA Governor warned that "we have been going around and around on this stuff but I think we need get something out to the markets soon".


The Treasurer has held open the possibility that millionaires will be able to opt out of the proposed new tax on big bank deposits.

After telling parliament on Tuesday that the fee to be charged on accounts worth more than $1 million would "be paid by all depositors in the deposit-taking institutions" he said yesterday that he was considering allowing big depositors to opt out.

"We have been consulting widely on this question and continuing a series of consultations through today and tomorrow on all of these matters," Mr Swan told parliament.

"As for the details, which have been the subject of some comment - the level above which large deposits will be treated as wholesale funding, how much the fee will be, how a fee will be structured, whether it would be flat, whether it would it be tiered, who would pay and whether it was compulsory or opt in - all those things have been on the agenda."...

He made the concession after being asked in Question Time how the fee would affect a depositor who had relying on the government's assurance that bank deposits would be guaranteed and locked in their money for a 12-month term.

When the Prime Minister announced that the government would guarantee bank deposits on October 12 he made no mention of big depositors being charged a fee.

Appearing before a Senate estimates committee the head of the Australian Prudential Regulation Authority John Laker said the announcement prompted big withdrawals from foreign-owned bank branches not covered by the scheme.

"But that was an initial reaction and I think the most recent advice I've got is that that situation is on hold pending the announcement of the details of the guarantee,'' Dr Laker told the committee.

The Shadow Treasurer Julie Bishop said the uncertainty was creating "massive confusion".

"Billions of dollars has moved from the foreign bank branches into the banks included in the guarantee," she said.

"Now I've been contacted by asset managers who say they want to take money out of the banks because they don't want to attract a fee which would be passed on to their deposit holders. They want to take the money out of the bank.Is that an intended consequence, to take money out of the banks, was that an intended consequence of the announcement of a new tax?''

The goverment is helping, H-E-L-P-I-N-G

Get it?

The Government may be on the ropes over its decision to guarantee bank deposits, but the Opposition is going over the top.

How’s this for an overegged claim?

“The government’s own actions have caused greater instability in the Australian financial markets than any event that has occurred overseas”.

That’s from the Opposition Treasury Spokesman Julie Bishop.

What about this from the Opposition Leader Malcolm Turnbull?

“We have seen institutions not covered by the deposit guarantee losing money, we have seen funds putting a stop on redemptions, we have seen savings frozen.”

We have indeed seen those things. Perpetual, AXA and Australian Unity each put some sort of freeze on their redemptions late yesterday.

But it’s a stretch to say they did it primarily because the government guaranteed bank deposits...

Bank deposits have always been implicitly guaranteed by the government. They have always been regarded as safer than the funds run by the likes of Perpetual, AXA and Australian Unity.

Money was always going to be moved out of the Perpetuals and into the banks as soon as global financial troubles turned into a global financial crisis.

Explicitly guaranteeing bank deposits (and also deposits in building societies and credit unions) doubtless accelerated the trend. The Reserve Bank and the Prudential Regulation Authority have said so.

But it didn’t cause it. We would have had instability, a run on funds, and funds frozen without it.


What if inflation hits 5 per cent?

It has. So what?

The Treasurer has declared victory in the war against inflation as the official rate hits 5.0% - double the Reserve Bank’s target.

Prices are now climbing faster than at any time since 1995, apart from the spike when the GST was introduced in 2001.

The Reserve Bank’s preferred measure of inflation, the so-called underlying rate, hit 4.7% in September - its highest point since the recession of 1991.

The acceleration means that prices are now climbing faster than wages, sending buying power backwards.

The Treasurer Mr Swan greeted the news by declaring that while inflation was historically high, he believed it had peaked...

“That is the view of the Reserve Bank and if you look at what's happening in terms of global commodity prices and global growth I think that is an accurate prediction,” he said.

Private sector economists agreed, the Commonwealth Bank’s Michael Blythe saying that financial meltdown and the risk of a global recession would “fix” Australia’s inflation problem.

“Inflation typically peaks and then turns down during slowdowns or recessions,” he said. “Rising unemployment takes the heat out of markets.”

Australia’s 5.0% inflation rate in the year to September would have been an even-higher 5.13% had it not been for a one-off drop in the recorded price of childcare as a result of the government’s decision to boost the 30% Childcare Tax Rebate to 50%. The move pushed down the recorded price of childcare 23% from July.

The fastest-growing prices during the quarter were those over which consumers had little influence. Petrol was up 2.0%, electricity up 4.9%, property rates and charges up 6.1%, and rents up 2.1%.

By contrast the slower-growing or falling prices were those that weaker consumer demand was able to influence. The price of men’s clothing fell 1.9%, the price of children’s clothing 2.1%, and the price of audiovisual equipment 3.9%.

The rate of inflation on imported goods fell during the September quarter despite the lower dollar, suggesting that retailers are paring back margins in order to keep customers.

“We expect this process to intensify as firms have less pricing power and feel less able to pass on cost increases in full,” said ANZ economist Warren Hogan. “Weaker employment will also help push down inflation.”

Mr Swan refused to speculate about the future of employment, saying the government would update its forecasts in its Mid-Year Economic and Fiscal Outlook, due “within the next month”.

Appearing before a Senate estimates hearing Treasury official David Gruen revealed that his department had conducted no formal economic modelling during the lead-up to government’s $10.4 billion economic stimulus package.

“We are dealing with a situation of substantial disruption in credit markets. With the best will in the world it is extremely difficult for formal models to come to terms with such events, he said. “It is a situation which calls for judgement.”

The futures market is still pricing in an 80% likelihood of an interest rate cut of 0.50 points at the Reserve Bank’s Melbourne Cup day board meeting despite the elevated inflation rete..

“Concerns about inflation have been overtaken by fears about slumping growth,” said Citibank economist Paul Brennan.


Wednesday, October 22, 2008

Today's extraordinary Senate hearing

More details later.

The transcript of Ken Henry's grilling at the economics committee will be here in a day or two and will make great reading.

One highlight was Senator Bill Heffernan. He asks straightforward questions.

Hef: Has Australia ever been where we are going?

Henry: Excuse me Senator.

Hef: The position that we are in and the globe is in. Have we ever had to design what we are now designing before?

Henry: No. No Senator, these circumstances are quite unprecedented. I don't think there would be policy advisor or policy maker alive today who had confronted circumstances such as these.

Tuesday, October 21, 2008

Inflation's high. So what?

Australia’s inflation rate is set to hit a long-term high of 5 per cent when the figures are unveiled tomorrow – well beyond the Reserve Bank’s target zone. But the Bank is expected to keep on cutting Australian interest rates regardless.

On Monday both the Commonwealth Bank and the National Australia Bank announced plans to cut their mortgage rates in anticipation of the Reserve Bank’s next move following the lead set by the ANZ Bank on Friday.

The Commonwealth will cut its variable mortgage rates by 0.21 percentage points, the National Australia Bank by 0.20 points, and the ANZ by 0.25 points. Westpac is yet respond.

The key measure of business price inflation, the Producer Price Index, jumped a record 2.0% in the September quarter, and 5.6% over year – the sharpest increase in the decade since the index has been calculated. As a result economists have increased their forecasts for the annual consumer price inflation rate to 5.0%...

...but they say the release of the news on Wednesday won’t worry the Reserve.

“The Bank believes this will be the peak,” said Commonwealth Securities economist Savanth Sebastian. “World oil prices have crumbled and we are facing a global slowdown”.

“The inflation numbers are irrelevant so long as global deleveraging dominates the economic outlook,” said ANZ economist Warren Hogan. “The inflation risks will eventually subside, and indeed in twelve months we might be facing the opposite problem.”

Financial markets expect the Reserve Bank to remain focused on the risk of an economic downturn and are pricing in a 92% probability of a further rate cut of 0.50 points at the Bank’s next board meeting on Melbourne Cup Day.

Such a cut would take standard variable home loan rates below 8%.

Adding to the case for a further interest rate cut is news from China showing that its economic growth rate has slumped below 10%.

At 9%, China’s economic growth rate in the year to September is its weakest in five years.

In Parliament the Prime Minister Mr Rudd said the way that China handled the slump would be important for both and the globe. He said he was heartened by a statement by the Governor of the People’s Bank of China, Zhou Xiaochuan, that China would need to boost its domestic consumption as its exports fell.

Asked how many jobs Australia would lose over the next twelve months the Deputy Prime Minister Julia Gillard said only that the May Budget had forecast and increase in the unemployment rate and that updatged forecasts would be released next month.

The Foreign Minister Stephen Smith said he was waiting on an invitation from the United States to take part in the economic summit proposed by President Bush in the lead up to APEC.

He had told both the US Secretary of State Condoleezza Rice and the French Foreign Minister Bernard Koucher that Australia was keen to attend.

The Governor of the Reserve Bank Glenn Stevens will outline his thinking about the state of the Australian economy in a closely-watched speech in Sydney today.


Could we be paying too much for our petrol?

Australian petrol prices have fallen by less than 14 cents a litre at a time when the international oil price has more than halved.

The figures, provided to The Age by Australia's petrol prices commissioner designate Joe Dimasi, suggest that Australian retailers and oil companies have been dramatically widening their margins - although the commissioner is not ready to jump to that conclusion.

Tapis crude, the price benchmark most relevant to Australia, peaked in July at $US147 a barrel and on Sunday was just $US70 a barrel. The investment bank JP Morgan says $US60 a barrel is likely sometime next year.

Adjusted for the slide in the Australian dollar, the crude oil price has fallen from a peak of $A153 a barrel in July to $A100.

The move suggests that the Australian retail price of petrol should have fallen 57 cents a litre since July. Instead, it is down 13.9 cents...

...hovering just under $1.50.

Had Australia's petrol price fallen in line with the international oil price we would now be paying around $1.05 a litre.

But Mr Dimasi says the comparison is misleading.

"People get mixed up on this all the time," he told The Age ahead of his official appointment as petrol prices commissioner next month.

"What you need to look at is Mogas 95, which is the average daily Singapore price of refined unleaded petrol. It's that that determines the Australian price because it is imported in Australia.

"Its price is down only 16.6 Australian cents from the peak. The average five-city retail price in Australia on Thursday last week was down 13.9 cents.

"It is true that the Australian price hasn't come down by as much as the Singapore price. Our price appears to have fallen by about 2 to 3 cents per litre less, depending on which day you measure it."

Mr Dimasi last week wrote to the big four oil companies and to Woolworths and Coles seeking an explanation.

"Their initial response is that things are very volatile, that they look at things on a daily basis and that their pricing practices haven't changed.

"I have asked them for more detailed explanations."

Asked what he and the Competition and Consumer Commission could do if they were unsatisfied with the answers Mr Dimasi replied there was "quite a lot we can do".

"The first step is to just be confident of all the facts. Right now we are through their books and looking at their costs and prices and profits.

"But in the meantime I would like to do away with some myths. People think that it's the crude oil price that matters, but it is really Mogas 95. I'd like to get that price in the paper every day, so that people can get a better sense of what's going on."

Asked why Mogas 95 didn't move in line with the crude oil price, he said there were all sorts of reasons.

"You might get a refinery that might be out, you might get a holiday season, demand is different during winter and summer ...

"At the end of the day, in the long term, the refined petrol price moves will move with the crude oil price, but it's not a parallel link."

Going down:

Since July

$US crude oil

down 52%

$A crude oil

down 35%

$A Singapore unleaded

down 16.6 cents

$A Australian unleaded

down 13.9 cents


Sunday, October 19, 2008

Canberra rejects Labor... and the Liberals too

As today's Canberra Times puts it:

"Canberra has emphatically rejected Labor majority rule, stripping the party of two seats and turning its anger into a historic vote for the Greens.

The ACT Greens will have three seats in the next Assembly - one in each electorate. Labor is left with seven seats, equal with the Liberals. There is still a slight chance the Greens could pick up another seat at the expense of the Liberals.

The Greens will hold the balance of power in the Assembly and the ability to choose the next chief minister."

So China will save us from a recession, right?

On Saturday the Age's China correspondent John Garnaut took us inside the faltering boom:

"On September 1, after eight boom years, the daughter was told to take an extended "rest" without pay. She knew the factory was in trouble. In March Han's 20-year-old son started work, loading the dust-like iron ore "fines" into compactors so that it doesn't all blow away when dropped into the furnaces. On September 27 he was stood down on a fortnightly roster of unpaid leave. "If the factory closes this whole village will have nothing to eat," Han says.

For five years China has been the saviour of the Australian economy. Its massive urbanisation has pumped up the prices of Australian resources and began to fill the economy with cash when it was needed after the housing bubble earlier this decade. Now, with the world rocked by the financial crisis, if China can no longer afford to pay inflated prices for commodities then the Australian economy is in deep trouble."

Also I attempted to sum up how things look at the moment:

"This was the week that fear of a financial meltdown morphed into fear of a global recession.

Believe it not, it’s an improvement. A meltdown of the financial system would have destroyed the needed to recover from a recession...

It has taken massive injections of government funds into formerly private banks in order to shirt back from the brink of a meltdown to do it as well as government guarantees of bank to bank lending and near-global unlimited guarantees of bank deposits.

Australia did its part on Sunday, abandoning an ill-conceived plan to guarantee only the first $20,000 of each Australian bank deposit and declaring that Australian taxpayers would guarantee the overseas borrowings of every Australian bank, building society and credit union without limit, in return for a fee.

Both in Australia and the US the enormous premiums that financial institutions were charging each other just to do normal business have begun to shrink. They have a long way to go until they have shrunk back to where they were, but at least they are no longer inexorably climbing.

A day later the US economist Paul Krugman was awarded the Nobel Prize for Economics. He has specialised in examining the collapse of trust in Japan at the end of the 1990s. There, no matter how low official interest rates fell (and they got close to zero) Japan’s banks wouldn’t part with whatever money they could get and Japan’s citizens were reluctant to borrow from them and deposit with them because they had lost faith in the system itself.

Japan remained in or near recession for a decade, a situation Krugman described as “a scandal, an outrage, a reproach,” and a human disaster which had “subtracted value from Japan and the world on a truly heroic scale.”

Until the US modified its flawed $US700 billion financial system rescue plan this week to make it more like that introduced in the UK, and until the much of rest of Europe and Australia followed suit Krugman was worried that Japan’s lost decade would be repeated worldwide.

The Washington meetings attended by leaders including Australia’s Wayne Swan on the weekend brought forth a shared determination to do whatever is necessary to ensure that financial institutions lend to each other rather than hold on to their money - even if it means taking them over.

As Krugman put it on Australia’s ABC radio within hours of receiving his Nobel Prize, “if you can’t persuade people to lend to each other, then one way or another the government has to take over the function of getting money moving – it has to do whatever is necessary”.

On Wednesday at the National Press Club Kevin Rudd seemed to revel in the turn of events. “What we have seen is the comprehensive failure of extreme capitalism – extreme capitalism which now turns to government to prevent systemic failure, an institution it spent decades deriding,” the Prime Minister said.

What’s at stake is more serious than a game of blame.

It is well accepted that poor people and poor nations usually find it hard to borrow from banks, even for good projects. Economists call this a market failure. What’s concerning them is that that failure would spread to everyone – that after being too generous with funds, investors and financial institutions will no longer lend them out at all. Nothing was more emblematic of the problem than the failure of the fast food giant McDonalds to extend its loan with the Bank of America last month. “If McDonald’s can’t get a loan using one the best business models on earth, who can?,” the critics asked.

In Australia, even after Sunday’s financial rescue package, funding for potentially worthwhile projects has become to find. Funding for potential duds has dried up. Most of the members of the consortium which was to bid against Telstra for the right to build Australia’s fibre-to-node broadband network are reported to have withdrawn. Telstra itself is said to be finding it hard to find the finance. As the ANZ pithily put it in a note to clients, “investment in Australia cannot be expanded if it cannot be cost-effectively funded”.

It had been thought that Australia would escape the recession set to sweep through the industrialised world. The US, the UK, the European Union and Japan are all on the brink of recession and New Zealand has already slipped into it.

Our strong card was our exports. Huge increases in the prices and volumes of our coal and iron ore shipments gave us our second biggest trade surplus on record in August. Coal export prices have jumped 70% in the past three months after jumping 54% in the three months before that. We are earning 30% more from our exports than we were a year ago, and many of the prices are locked well into the future.

But the future beyond that looks awful. When the current contract prices end they will be replaced by new ones much lower. TD Securities is predicting a drop of around 30% in Australia’s terms of trade. The Baltic Exchange Freight Rate Index, usually a good predictor of commodity prices, is down 75% from its peak and is expected to fall further.

“Having ridden the back of the commodities boom over the past 5 years, the sharp reversal in prices now well and truly unfolding spells huge trouble for Auistralia,” says TD Securities.

“The further commodity prices fall, the more problematic is the outlook. Indeed, it is easy to see why the Reserve Bank is embarking on one of the most aggressive interest rate cutting exercises seen in Australia, and the government is willing to spray money around to the embattled household sector.”

The problem isn’t that the Australian economy has begun to turn down. Employment is continuing to grow. It’s that the psychology of employed Australians has begun to change.

For years now Australian households in have been spending more than they earn – behaviour that seems irrational until you consider what’s been happening to their wealth. As the value of Australian’s houses has soared (along with their ability to get access to that value through refinancing) and the value of their share market and superannuation portfolios have also soared it’s felt rational to spend up.

Now the mechanism has been thrown into reverse. Although Australians are still earning just as much as they were, they are now seeing the value of their savings and their houses shrinking. It feels right to pull in their heads.

Gerry Harvey of Harvey Norman says this week he had “stores out there where sales are up 5% and 10% and lots of stores that are down 5% and 10%, but the sum total is we are down 4.7%… I can't remember when that last happened”.

Tuesday’s $10.4 billion economic security package was designed to turn things around. There is little doubt that it will, at least during the fortnight in December when around $8 billion of the package hits the accounts of pensioners and family benefit recipients. When the US pumped a similar proportion of its income into cheques paid to families in May it managed to avoid a recession. But it’s a trick that only works for a while.

The government’s thinking - or perhaps it’s a hope – is that by the time the effect fades, perhaps in a few months, Australians will have noticed the sharply lower mortgage rates and feel better about spending anyway.

If that doesn’t happen, the Reserve Bank will cut rates again, and then again. And we may just get another economic stimulus package. Australia is blessed compared to its counterparts in that it has begun the process with a very high interest rate so it can do a lot of cutting until it gets to zero. By contrast the US has an official interest rate of 1.5%. There’s not much more it can do. The Australian government is debt-free and has tens of billions awaiting spending in special funds. It can afford many more stimulus packages than the US.

Some observers think that that was one of the reasons it made its package is so big – to show that it could. The actors in the ABC’s Hollow Men noted that “$10 billion” is a figure that gets attention.

The competing theory is that the government is expecting such an economic downturn that only $10 billion can prevent it. By not making public its forecasts until the release of the Mid-Year Economic Review next month the government is fuelling that suspicion.

"This package is bigger than we have ever seen before," said Professor Bob Gregory of the Australian National University this week. "That must mean that their forecasts are worse than anything we've ever seen before."

An unspoken government aim appears to be maintaining Australia’s high house prices. Yeas ago a Howard government Minister Ross Cameron observed that rising house prices “makes for happy voters.” The authorities’ aim right now is to stop voters getting much more unhappy. The government and the Reserve Bank can’t control share prices, but they can influence house prices by doubling and in some cases tripling the First Home Owners Grant and by slashing interest rates.

Having the Treasury’s Official of Financial Management spend another $4 billion funding the mortgages sold by non-bank lenders is another way of keeping downward pressure on mortgage rates.

We have moved a long way from the days when these sorts of measures would be seen as unwelcome signs of government interference in “the market”. The financial market has been barely functioning, and even now no one is certain that it is back on the road to health.

Avoiding recession will need everything that Mr Rudd and his advisors will come up with.