Productivity Commission tells the truth about free trade agreements

No wonder they won't let it near the NBN

A year-long investigation of Australia's free trade agreements has found they are often nothing of the kind.

The Productivity Commission has told the Gillard government there is little evidence to suggest Australia's six free trade agreements have produced "substantial commercial benefits".

Some may have actually reduced trade by introducing complex rules that make it difficult for Australia to sell goods made with products imported from countries not party to the agreements.

The extra cost imposed by these so-called "rules of origin" could amount to 8 per cent of the value of each export shipment.

Copyright provisions inserted in the US-Australia Free Trade Agreement could eventually cost Australia as much as $88 million per year as the nation pays an extra 25 per cent each year in net royalty payments, "not just to US copyright holders, but to all copyright holders"...

The copyright provisions extend payments from 50 years after an author's death to 70 years and enshrine in Australian law "rules that would otherwise be anti-competitive such as permitting the use of region codes on DVD players".

The provisions have, in effect, saddled Australia with copyright obligations "even higher than in the United States," the report says.

"This is because we matched their higher level of copyright protection but have maintained our lower level of copyright users' rights."

The net present value of the extra copyright costs imposed on Australia by the provisions agreed to by the Howard government when it signed the US-Australia agreement might amount to $700 million.

"And this is a pure transfer overseas, and hence pure cost to Australia," the report says.

It finds provisions inserted in the US Australia agreement granting drug manufacturers greater rights in their dealings with Australia's Pharmaceutical Benefits Scheme had real potential for adverse outcomes and that "vigilance was required to ensure this did
not arise".

The Commission says before agreeing to further FTA's Australia should first consider whether other options could deliver similar or greater benefits at less cost, among them trade facilitation, investor protection and mutual recognition of standards.

Until 2003 Australia had only one free trade agreement, with New Zealand.

The Howard government signed agreements with Singapore, Thailand and the United States, and the Rudd government with Chile and ASEAN.

The Gillard government has continued to negotiate agreements with China, Malaysia, Japan, Korea, Indonesia, the Gulf Cooperation Council and the Pacific Island Forum.

The Department of Foreign Afffiars and Trade was unable to tell the Commission how much it spent negotiating the agreements, saying its trade work could not be "separately identified and costed".

Trade Minister Craig Emerson welcomed the Commission's report saying he had already announced a review of Australia's entire trade policy framework.

The Australian Services Roundtable said the existing process "does not work".

"For a decade now trade negotiations based on the trade-off mentality have not delivered any
significant reductions in services trade barriers," said executive director Andrew McCredie.

Published in today's Age


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Bernie Fraser on his new gig

The man who will determine how easy it will be to switch from the big banks has signaled he will formidable in getting answers from the big four saying he knows how to "cut through the bullshit".

Former Reserve Bank and Treasury chief Bernie Fraser will meet with the big four and also consumer organisations and building societies and credit unions in order to work out whether it is possible to make account numbers fully portable between institutions.

Speaking to the Herald from his farm near Canberra he said it was clear there was a problem.

"In every survey that's been done where people are ask what they think of their banks, around 70 per cent say they don't like their bank or are unhappy - but they don't move. Inertia is a very powerful force."

Coming to the job without knowledge of the technical problems that might prevent account number portability Mr Fraser said would act like a management consultant, "a fresh pair of eyes" able to get answers out of the banks.

"I have experience talking to the heads of the banks as Reserve Bank governor, although I had a big stick though in those days, I used to regulate them... It meant I could talk softly and they would listen."

"These days they seem aggressive in defending their self interest, which is fine up to a point."

Asked if he would be to get to the truth Mr Fraser said he had been doing it for 40 years.

"I have always been questioning of things that have been put to me, probing and wanting to be satisfied of even quite simple things, much to the dissatisfaction of some of my colleagues on occasion."

"I think it helps to cut through the bullshit sometimes.

Although on the board of Members Equity Bank, one of the institutions that would benefit from account number portability, he said he did not see a conflict of interest.

"In most things these days there is that perception if anyone has an involvement in something that is in someway embraced in an inquiry. But these things can be managed if the people involved have reasonable integrity, and I would hope I could still claim to have that."

While welcoming the inquiry consumer organisation Choice said it should not hold up more immediate steps to make bank switching easy.

"Consumers wanting to move to a new bank should only have to sign a single form at their new bank that guarantees the speedy transfer of all their direct debits and credits from their old bank," said Choice better banking campaign director, Richard Lloyd.

"We want the banks to take the hassle out of switching now."

"Some say the banks won't listen. We need to see leadership from the banks themselves."

University of NSW competition expert Frank Zumbo said the inquiry would develop proposals that might take years to implement or might never see the light of day.

"We don't have key details and we don't have clear timelines," he said. "In the meantime the big four banks can extend their dominance."

The head of the National Australia Bank Cameron Clyne will appear before the Senate banking inquiry in Sydney today along with representatives from the Treasury and Reserve Bank. The heads of the Commonwealth and ANZ banks will appear on Wednesday.

Published in today's SMH


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Swan's symbol. Should the banks be scared?

YES - Gottliebsen

NO - Colebatch

WHATS IN IT

Ban on exit fees (for new mortgages)

Inquiry into account number portability

Mutuals fast-tracked to become banks

Deposit guarantee extended indefi nitely

Government Protected Deposits logo

Standard facts sheet for mortgage offers

Prosecutions for price signalling

Government to fund $4 billion more mortgages, Covered bonds, bullet mortgage securities


WHATS NOT

Outright ban on mortgage exit fees

Tracker mortgages with fi xed margins

Limits on how much banks can charge

Australia Post competing as a bank

New financial system inquiry

Bank super profits tax

An inquiry to be headed by former Reserve Bank chief Bernie Fraser heads a package of government measures aimied at taking on the the big four banks, already derided by one of their competitors as "not a silver bullet, not even a copper bullet".

Treasurer Wayne Swan has promised to outlaw mortgage exit fees, but not until next July and only for mortgages issued from that time on.

"There is absolutely no justification whatsoever for exit fees of up to $7000," he told a Sunday parliament house press conference.

"If people are unhappy with their institution and want to walk, at that price they will never afford to."

But the Treasurer balked at abolishing such fees... saying he had received legal advice that altering existing contracts without compensation would be unconstitutional.

He also resisted requiring banks to offer "tracker mortgages" that moved in line with indicator rates, limiting the extent to which banks could move lift rates independently of the Reserve Bank, empowering Australia Post to act as a bank, and imposing a super profits tax on excess bank earnings.

Instead, arguing there was "no silver bullet" he has placed his faith in measures that will make it easier for customers to switch institutions asking former Reserve Bank governor Bernie Fraser to inquire into full account number portability and requiring banks to offer mortgage customers information in a standard format.

"We are going to give this a go. Account number portability does not exist anywhere else in the world at this point in time. It took 15 years to get mobile phone number portability in Australia in what was a new and young and dynamic market," he said.

"I am not raising expectations, but it is worth a go."

Portable bank account numbers would mean that payroll destinations and automatic payments need not change when someone switches institutions. Mr Swan will investigate setting up a central government repository to hold all mortgages so that refinancing would not require a change of mortgage or a new mortgage insurance fee.

Labeling transferability "the Holy Grail of bank reforms" independent Senator Nick Xenophon said if it worked it could make changing banks as easy as changing power companies. He rejected claims by some banks that it could take a decade saying it "only took eight years to put a man on the moon".

Mr Swan also held out the prospect of more than doubling the number of Australian banks saying he would quickly approve applications by credit unions and building societies to rebadge themselves banks and that there were around 25 that already qualified.

He will promote the small lenders with an advertising campaign entitled "Bank on a
Better Deal," and allow them and the banks to use a new orange and grey logo reading "Government Protected Deposit".

Almost all deposits will now be protected in perpetuity. Mr Swan said the existing scheme which protects deposits of up to $1 million would be made ongoing when it expired late next year, although there was a possibility the threshold could be altered.

An intended beneficiary, Bank of Queensland chief David Liddy said the changes did little for samll lenders and could "put this idea of a fifth pillar back about 15 years."

“Not only is there no siliver bullet but he hasn’t even given us a copper bullet,” he told The Age/Herald.

Mr Swan will direct Treasury to spend an extra $4 billion buying mortgage-backed securities, taking its total holdings to $20 billion.

Mr Liddy said he was hoping for more. The market remained stalled.

In a statement the ANZ Bank said it had not been consulted Mr Swan and pointed to the "difficulties a lack of consultation created in the mining industry".

Other measures are wins for the big banks as well as their competitors. Treasury will encourage the development of "covered bonds" where repackaged and onsold mortgages remain on the lenders balance sheet and "bullet mortgage backed securities" designed to pay interest and then principal in a way that is attractive to investors in bonds.

Shadow Treasurer Joe Hockey gave Mr Swan "3 out of 10," saying he had stolen 3 ideas from him and had shied away from others such as banning mortgage exit fees outright.

Published in today's SMH and Age


Mortgage Key Facts Sheet


Competitive and Sustainable Banking


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Uncomfortable maths. Employment up 4.7%, retail spending up 3.9%

The West Australian's Shane Wright on why we're sitting on our hands:

"Conservative consumers have got the Reserve Bank in a bit of a quandary. While the Reserve is lifting official interest rates (though it should leave home loan borrowers alone at its last meeting of the year tomorrow) for fear of a consumer-led inflation breakout, those same consumers are not playing ball.

The Reserve is terrified that as we go through what is shaping as a once-in-a-century explosion in our terms of trade, the cash flooding into the country will be parlayed into higher and higher prices as shoppers spend up.

The problem for the Reserve is that on the available evidence so far that is just not happening...

Last week’s September quarter national accounts provided the latest sign that so far consumers are sitting out the boom.

In the 15 months between December 2006 and March 2008 — when the mining boom was in full roar and the Reserve was jacking up rates to control inflation — household final consumption spending rose 6.3 per cent.

But in the 30 months since then the same measure of what households were spending was up just 3.9 per cent.

That includes the period of interest rates at a 50-year low and the Federal Government’s cash handouts.

Clearly, the big spending lift pre-global financial crisis was unsustainable.

We were not handling the mining boom well.

The housing boom was well entrenched, credit from all banks and non-banks was easy, and Canberra was delivering tax cuts.

It was effectively a perfect inflationary storm, and it required the Reserve to take rates just before the collapse of Lehman Brothers and Bear Stearns to 7.25 per cent.

But the GFC has seemingly changed consumers’ mindsets.

Much was made of household consumption growing about 0.6 per cent in the September quarter.

But given 106,000 people moved into the jobs market during that period, it would be almost impossible for household consumption not to grow.

In that December ’06 and March ’08 period when we were spending up, total employment grew 486,400, or about 4.7 per cent.

But since then employment has grown 536,400, or 5 per cent.

In other words, even with the total number of people getting work increasing faster than in the pre-GFC salad days, we’re not spending nearly as much.

The Reserve has talked at length about the emergence of the conservative consumer, with governor Glenn Stevens again touching on the phenomenon in a recent speech.

“Considering what has happened around the world in recent years, more cautious behaviour by households is not surprising,” he said. “Nor, I would argue, is it unwelcome.”

But Mr Stevens does not believe we will keep shut our wallets and purses for too much longer.

“To expect it to absorb a major surge in consumption at the same time as an historic increase in investment is also occurring would be rather ambitious,” he said. “In fact, we probably need private saving to remain on a higher trajectory, and we will also need public saving to rise, as scheduled.”

But what if he is wrong?

What if we have been so cowed by the events of the past two years (and the ones ahead) that we are not going to go on a spendathon?

That has pretty serious ramifications for the Reserve and its efforts to curtail inflation.

Big international global investment company PIMCO, which in this country manages about $28 billion in fixed income (with a heavy focus on the bond market), is banking that the conservative consumer coupled with governments intent on cutting expenditure will keep a lid on growth over coming years.

Senior vice-president Tony Hildyard last week said those investors punting that sharemarkets would bounce back in the near term would do their money because they were ignoring the new mindset that would slow the global economy.

“In fact, for the first few years of the corrective phase, global growth has the potential to trend even lower as deleveraging and high unemployment constrain consumers,” Mr Hildyard said.
In Australia, unemployment is not the problem.

But as the national accounts (and associated credit card figures) show, we are saving a lot more of our hard-earned money.

The household savings ratio pushed back above 10 per cent last quarter and has been there since the GFC. Five years ago it was negative. What is going on is deleveraging. That, by itself, is not a bad thing, as Mr Stevens said.

However, it requires a bit of more nimble thinking by the Reserve and policymakers.

Higher interest rates will not necessarily work in a country where people are not the cause of consumer inflation.

Canberra simply can’t afford to hand out tax cuts like it did pre-GFC, so the chance of funnelling mining tax revenues direct to shoppers is slim. And as the Reserve said in its submission to the Senate’s banking competition inquiry, the interest rates banks are offering on deposit has gone from an average 60 basis points below the official cash rate to 70 points above it.

Where pre-GFC putting your money in a bank account and waiting for the interest to swell your savings was a mug’s game, now there is money (albeit not at a great return) to be made in the savings game.

It is easy to forgive shoppers for sitting on their hands.

The past two years have been tumultuous on the economic front. That tumult continues, with everyone waiting for another part of Europe to succumb to a bank bailout, the US in a gridlock and Japan slowly ebbing away on the back of huge demographic changes.

The only saving graces are China (which is trying to defy the history of communist rule everywhere) and India (which had trouble pulling together a Commonwealth Games).

No wonder we will not leave the couch and the comfort of our cut-price big-screen TV. Who wants to go outside and face that sort of economic weather?"


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NSW is sick no longer

NSW is now the engine of Australia's employment growth producing jobs at a far faster rate than any other state or territory and at twice the rate of Western Australia.

A surge in employment of 55,000 last month, all of the jobs full-time, took the took the total number of full-time jobs created this year to an all-time record of 300,000 - with one month left to go.

NSW created almost four in every ten of those jobs, piling on jobs in the past six months an annualised pace of 5.1 per cent, double Western Australia's 2.6 per cent.

Premier Kristina Keneally the NSW unemployment rate of 5.1 per cent was now below that of every state other than Western Australia.

"Since its peak the NSW unemployment rate has slid 1.7 percentage points, compared to a 0.5 nationally," she said.

The biggest drivers of jobs growth in NSW have been the education, health and aged care industries suggesting it is part of a general lift in the state's economy rather than deriving from mining...

Last week's generally weak national accounts showed state final demand growing in NSW as it fell back in almost everywhere else.

Nationally employment is growing at an annual rate of 3.7 per cent, double the rate of population growth and way above the 2.5 per cent forecast for this financial year in the November budget update.

"This is simply a stunning figure," said Treasurer Wayne Swan. "We have produced record job creation during a very difficult period."

"It shows we got the big economic calls right during the global recession and are continuing to get them right to support employment and to support people in work. There will be some people in a patchwork economy who are not doing as well as others, and particularly in the lead up to Christmas it’s always important to acknowledge those people, but these are figures are the envy of the rest of the world."

Full-time employment passed 8 million for the first time in November as total employment passed 11.4 million. A record 66 per cent of Australians either worked or made themselves available for work leaving the national unemployment rate above 5 per cent at 5.2.

HSBC economist Paul Bloxham said were it not for the jump in the number of people prepared to work in the past six months the unemployment rate would already by 4.5 per cent.

"It would be putting additional pressure on an apparently scarce resource, labour, and driving up its price, wages. Instead we have new supply coming on line with the market economy drawing in more warm bodies."

"As long as this continues, it's a Goldilocks story of Australia."

Nomura Securities economist Stephen Roberts said unemployment was set to fall quickly through 5 per cent, "a level that in the past has been consistent with accelerating wage pressure".

He expects the Reserve Bank to push up interest rates as soon as March.

ANZ economist Katie Dean said said the figures added to a growing risk that consumers "won't remain as restrained at the checkout".

The consensus forecasts released at this week's business economists forecasting conference have interest rates steady until mid next year and then increasing three times in quick succession before year's end.

New jobs this year, unemployment rate

NSW 132,000 5.1%
Victoria 93,000 5.5%
Queensland 71,000 5.5%
Western Australia 41,000 4.5%
South Australia 16,000 5.6%
Tasmania 3000 5.4%

ABS 6202.0 November, seasonally adjusted.

Published in today's SMH and Age


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6202.0

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That investigation into the Tax Office computer meltdown?

The Inspector General of Taxation has completed his investigation of the troubled ATO computer system that earlier this year delayed up to one million returns and sent out refund letters without cheques.

Ali Noroozi delivered the report on the ATO change program to Assistant Treasurer Bill Shorten on Friday. The Minister has 25 parliamentary sitting days in which to release it.

Mr Norozzi received more than 90 submissions, many of them strictly confidential.

Although he can't talk about his findings until the report is released he is appealing to the public for new ideas about future investigations...

He wants suggestions by February 28 which he will use to draft his work program for 2011 and beyond.

"I am seeking the broadest engagement practicable," he told The Age. "I will consider all issues raised and review matters with the most potential for making the tax administration system fairer, simpler, more transparent, or more efficient."

Ideas already under consideration include Project Wickenby, the management of transfer pricing disputes and funding for test cases.

Already well advanced is planning for investigations into the ATO's treatment of small and medium sized enterprises and high wealth individuals.

Published in today's Age

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It's the vibe of the thing: How the Reserve sets rates

Lowe's full speech is below

Ever wondered about the worth of official forecasts?

The Reserve Bank does too, and refuses to take them literally.

In a candid assessment of limitations of expert predictions delivered to a Sydney conference of business economists last night assistant governor Philip Lowe said they weren't that important in driving interest rate decisions.

What mattered more was analysis and a "storyline".

"The board’s decisions are not driven in a mechanical fashion by the forecasts," he told the forecasters. "Both the Bank staff and the Board are very conscious of the limitations of numerical forecasts."

"What is often more useful is the analysis and storyline that support the numerical forecasts."

Although the Bank aimed to keep inflation between 2 and 3 per cent it had never felt "the edges of the target were like an electric fence"...

Inflation had been outside the target band more often than it had been inside it but that was fine because the Bank also has to consider what's best for the economy.

At times it might be best to push up interest rates even if the target didn't require it if asset prices were rising quickly or there was too much borrowing.

While the Bank made use of a computer model and the judgment of its 50 or so economists it also relied heavily on"liaison"meetings with business figures - about 100 per month. On several occasions it has learnt things from those meetings it wouldn't have found out in any other way.

The forecasting conference received an update of forecasts from a group of 18 leading business economists including the chief forecasters for each of the big banks and foreign institutions such as Deutsche Bank and JP Morgan.

Their central forecast is for the Reserve Bank to leave its cash rates on hold until mid next year, after which it will push up three times in quick succession and then once more in 2012. But some forecasters expect just one rate rise next year and some as many as four.

On balance the Australian dollar is expected to remain at about $US1 until mid next year before sliding to 93 US cents by December and 87 by December 2012. But some expect little slippage predicting 98 cents by next December.

They expect solid growth of 3.5 per cent per year led by very strong investment growth of 13 per cent and 11 per cent. Inflation will climb at the very top of the Reserve Bank's target band setting at 3 per cent with unemployment settling at 4.8 per cent. The ASX 200 share index will climb from 4670 to 5300 by next December and 5500 by December 2012.

"There was a lot of agreement," said one of the forecasters, the ANZ's Warren Hogan. "It has me worried. It might mean things turn out completely different."

HOW THE EXPERTS SEE IT

Solid growth 3.5% 2011 3.5% 2012

Strong investment 13% 2011 11% 2012

High inflation 3.0% 2011 3.0% 2012

Low unemployment 4.8% 2011 4.8% 2012

RBA cash rate 5.50% 2011 5.75% 2012

Australian dollar US 0.93 2011 US 0.87 2012

ASX 200 share index up 13% 2011 up 4% 2012

Australian Business Economists executive committee

ABE Executive Forecasts




HOW THE RESERVE BANK SEES IT




Forecasting in an Uncertain World - 8 Dec 2010



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Swan's second chance

Wayne Swan botched his first attempt to take on the banks and then propped them up and allowed them to swallow competitors during the financial crisis.

They are now stronger than ever and unashamed. Their profits are higher than they have ever been (according to their own Association's submission to the banking inquiry) and the interest margins they charge have widened over the last two years (again according to their own Association).

What annoyed Wayne Swan right from his earliest days as Treasurer was that market mechanisms seemed not to compete that profit away. In a normal industry when profits are high competitors arrive and cut them down to size.

The big banks earn an incredibly impressive 16.1 per cent annual return on their equity - way in excess of what would be needed to make the business attractive. The smaller banks - often offering better deals - get by with just 12.6 per cent.

So why aren't we switching?...

Three years ago Swan thought it was because we found it daunting.

With unfortunate fanfare he unveiled "one single consumer complaints hotline - 1300 300 630 – providing a first contact point for all consumer complaints about basic banking products".

It turned out to be the ASIC switchboard.

He unveiled a "a detailed website providing advice on how to switch and the costs and the benefits of doing so," which turned out to be neither detailed nor to outline the costs of switching.

All this was meant to empower us to "walk across the street, "pass judgment" on our banks and "put them under competitive pressure."

Oh yes, and as we left our banks were required to hand us "accurate information on all direct debits and credits to take to a new bank for easier transferral," something they might have been expected to do anyway.

That it did none of these things would have surprised no-one who had ever attempted to walk across the street.

If you are not known to the new bank you need to prove your identity all over again. AUSTRAC requires driver's licences, passports and signed statements from long-term friends in authority. They want 100 points worth. If it is a joint account they will want them from your partner as well.

Even if you are known to the new lender you will still have to demonstrate your spending and savings habits all over again with months of bank statements and pay slips or group certificates and perhaps a letter from your employer.

The new lender might also want child support statements, even superannuation statements. It will want you to value your house or business all over again. And so on.

None of these things should be needed for a simple transfer between financial institutions. Swan was told so at the time.

Markets work well when transactions are near frictionless. That could be achieved by getting AUSTRAC to accept that an identification satisfactory for one financial institution is good enough for another. A house of business that has been valued by one institution as suitable for a long-term loan shouldn't need to be revalued when the loan is transferred to another.

Customers should no longer need to go to their old financial institutions to get a list of regular debits and credits, but should be able to authorise the new one to act as their agent and sort everything out.

There's every chance Wayne Swan will act to bring this frictionless world about in the new bank package he is about to introduce. But more cleverly, less dramatically.

Instead of promising that customers can "now vote with their feet" as he did last time, he will outline broad goals and begin a consultation process of how to deliver them.

The gold standard in frictionless transactions is a portable bank account number. We would be able to take our existing BSB and account number to a new institution without the need to reenter debits and credits or reprove our identities. But the bank's IT systems would need to be able to talk to each other. Putting the banks and consumer organisations together with Treasury officials and giving them months to test exactly what can be done might lead to a better outcome than a big announcement. And one that will stick.

It's happened before, with mobile phone number portability. What the carriers initially said was too difficult is now routine. Their margins have shrunk because of it.

The Treasurer is also likely to deploy government resources to strengthen the hand of credit unions and building societies when it comes to raising money and attracting deposits.

Along with greater powers for the Competition and Consumer Commission it's a pretty reasonable approach (albeit not as effective as price controls - a tool used to great effect in the early days of deregulated telecommunications).

But it will still make slow progress. There's something else that makes us reluctant to abandon banks that treat us badly.

We may be psychologically programed to reward bad treatment. In March this year the Australia institute asked 1360 Australians about their experiences with banks. One question asked whether a bank's profit helped determine how "safe" they thought it was.

An astonishing one in five thought it is safer to deposit money with a bank with bigger profits. Among customers of the big four it was one in four. Among young Australians it approached one in three.

If we continue to see profits as a sign of safety we will remain sticky for as long as we are being ripped off. Swan's new banking package will be an improvement. But he might have still more work to do.

Published in today's SMH and Age


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Softly I will leave you. Reserve ends the year quietly

The Reserve Bank has ended its year gently, leaving interest rates on hold and signaled they are likely to stay that way for some time.

After the Bank's final board meeting for the year - its last until February - governor Glenn Stevens released a statement saying it felt rate settings were "appropriate for the economic outlook".

Although Australia's trading position was the best since the 1950s and national income was "growing strongly," households continued to spend and borrow cautiously.

Business investment was beginning to pick up and strong jobs growth was likely to push up wages growth in the coming year.

Inflation should be "little changed" in the period ahead, increasing "somewhat" over the medium term...

Australian Retailers Association chief Russell Zimmerman found the news cheering.

"Christmas is the grand final of retail trade, some stores take up to 40 per cent of their yearly turnover from mid-November to Christmas Eve," he said. "There would be relief that rates are on hold."

Treasurer Wayne Swan also welcomed the decision saying it would help families finding it tough to make ends meet.

"We are determined to continue investing in the capacity of our economy during Mining Boom Mark II," he said. "We’ve got a comprehensive strategy to build future capacity, which is the best way to contain inflationary pressures over the long term."

Macquarie research director Brian Redican said the Governor's statement seemed designed to be as "uncontroversial as possible".

"It is unlikely to shift anyone’s views about the timing, or extent, of future monetary policy tightening," he said.

Financial markets were late yesterday pricing in only a 2 per cent chance of rate hike in February and a less than 50 per cent chance of a hike by mid year.

Former Reserve Bank economist Paul Bloxham, now with HSBC, was less certain the Bank was relaxed.

"The main message is in what was not said. There was no mention of any concern about the weaker real growth numbers or the recent weakness in retail sales," he said.

"The statement simply suggests things are playing out as expected."

TD Securities economist Annette Beacher said rates were on hold, but not for a year

"We remain of the view that the Bank is not finished tightening for this cycle. Inflation risks lie squarely to the upside due to booming national income growth," she said.

Published in today's SMH and Age





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The CPI is broken. Give us money and we'll fix it

The Bureau of Statistics has acknowledged big faults in the way it prepares Australia's most watched economic statistic, but says it won't fix them until it gets more money.

Our consumer price index stands alone among the those of leading nations in being prepared quarterly rather than monthly, forcing the Reserve Bank board to fly blind at most of its monthly inflation-targeting meetings.

The Bank believes it has made several mistakes in setting interest rates as a result.

Because much of the information is collected monthly it is up to three months old by the time it is averaged and presented to the Bank as a quarterly figure.

Announcing the outcome of a year-long review yesterday the Bureau reported overwhelming support for a monthly CPI particularly from "organisations with an interest in economic measurement of the financial sector".

But it said it would only produce one if received an extra $6 million to set it up... and then a further $15 million per year to produce it. Even then it wouldn't see the light of day for two to three years because of the need to hire staff, set up computer systems and test results.

The Bureau updates the weights of goods and services in the CPI only once every 6 years - less often than the international standard. As a result the index increasingly exaggerates inflation as the update approaches by giving too much weight to the quickly-rising prices of products consumers have stitched away from.

The review finds the overweighting overstates inflation by around 0.2 percentage points per year, incidentally pushing up by "several hundreds of millions of dollars" the cost of Commonwealth payments linked to the CPI.

It is prepared to update the weights every 4 years, but wants an extra $3.5 million per year to do it.

The uncompromising tone has been a hallmark of Australian Statistician Brian Pink since he arrived in the job in 2007 first telling staff they would no longer be expected to do more with less and then cutting or suspending a number of expensive surveys.

A spokesman for Treasurer Wayne Swan seemed to rebuff Mr Pink yesterday saying "decisions about the ABS work program and priorities are ultimately a matter for the ABS," but adding "any consideration of funding will be considered through the regular budget processes".

The Reserve Bank scored a smaller but important win the meantime, having the ABS agree to remove from the headline CPI an erratic subcomponent of the Deposit and Loan Facilities Index. An attempt to measure bank margins, the "price" is sometimes negative and bounced around in the global financial crisis. It will be still be calculated and reported as part of a separate index but will not be returned to the new index until it is improved.

Shadow Treasurer Joe Hockey expressed "alarm" at the change saying he wanted the ABS to be given the resources to measure bank margins properly and return them to the CPI.

The ABS also agreed to produce a seasonally-adjusted CPI and a CPI excluding food and energy prices from late 2011.

It had little joy for critics of the "quality adjustment" process it uses to push down the recorded price rises of cars and computing equipment saying it would "improve the transparency" of its documentation but would not produce a separate index excluding the adjustment.

Published in today's SMH and Age


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Immigration. At this rate they'll have nothing to worry about

Our rate of immigration is tumbling already.

During the election a bipartisan concern, the latest figures show net migration falling sharply with the number of permanent and long-term arrivals outnumbering departures by only 210,400 in the year to October, well down on the 324,700 a year before.

A rolling annual graph shows the rate continuing to plunge as increasing numbers of Australians head overseas and fewer immigrants come here.

In October just 9370 overseas arrivals settled on Australian shores, the lowest total since March 2004.

Although according with Prime Minister Gillard's expressed desire during the campaign for "a sustainable Australia, not a big Australia," the slowdown has ominous portents for Australia's economic boom...

"Businesses are shaking their heads," said Commonwealth Securities economist Craig James. "Job markets are tight with not enough local talent to fill positions. But while companies are crying out for staff, migrant numbers are plunging."

"Over the past year, the annual number of migrants has plunged by a record 35 per cent, robbing the economy of momentum at an important time."

"It is in the interests of all Australians to have a balanced job market. The last thing anyone wants to see is the Reserve Bank keeping interest rates at higher levels than they should be because restrictions on migrant inflows are pushing up wages and prices."

Separately released job advertisement data show advertisements up 2.9 per cent in November as firms struggled to get staff. Newspaper job advertisements rebounded 0.9 per cent after slipping for two months.

The ANZ says its count of advertisements points to a further jump in employment of 20,000 when the November figures are released Tuesday, enough to push the unemployment rate down from 5.4 to 5.2 per cent.

But it warns the job figures will "effectively cover hiring decisions made prior to the Reserve Bank's latest interest rate increase".

"Given anecdotal reports of more moderate consumer behaviour since, it is reasonable to expect some moderation in the rate of growth of labour demand in the months ahead," said economist Ivan Colhoun.

The high dollar and cheap airfares pushed Australian short-term departures to a record high of 7 million trips in the year to October. During that month we left the country around 600,000 times, up 15 per cent on the previous October.

Tourist arrivals have continued to climb despite the dollar, climbing 5 per cent in the year to October.

Tourism Task Force managing director is optimistic the trend will continue expecting an "Oprah Winfrey effect."

"She is a promotional and endorsement platform second to none," he said.

"Make no mistake - it is a coup that she has chosen Australia for her international foray and this will raise our profile in the United States and the scores of other countries where her show is broadcast."

New Zealand and the United Kingdom were by the far the biggest source of tourist followed by the United States, China and Japan.

The most popular destinations for Australian tourists are New Zealand, Indonesia and the United States, forllowed by the United Kingdom, Thailand and China.

Published in today's SMH and Age


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Swan's plan: Counterbalancing banks

. Crackdown on price signalling

. ACCC to monitor fees

. Consultation on bank-switching

. Banks to provide more information

. Government guarantees for mutuals


Australia's big four banks will face government-backed competition and much greater scrutiny as part of a package of measures aimed at weakening their market position due to be unveilled Wednesday.

To be presented to Cabinet today the Treasurer's five-point plan is short on detail in a number of areas, proposing further consultations with banks and consumer groups to draw up measures that will work.

Mr Swan is keen to avoid a repeat of the dashed expectations that followed his 2008 bank-switching package in which the reality of a non-existent hotline and badly-maintained website failed to live up the promises.

On bank-switching the Treasurer will announce broad goals including that bank switching should be a matter of filling in just one form and ask the banks and consumer organisations to refine the details. He will mention but not endorse the idea of portable bank account numbers as one way of achieving the goal...

The final shape of the measures will be announced in the first half of next year.

Mr Swan said yesterday he had been working closely with the consumer group Choice and would "keep working hard to empower consumers so they can always walk up the street and get the most competitive deal on offer".

Choice staff will today hand out chocolate money in Martin Place to launch a web-based service called "Compare, Ditch and Switch" which will allow borrowers to see a glance how much they could save by switching.

"You don't have to wait for banking reform. People who can spare a few minutes might be surprised at how much they can save," said campaign director Richard Lloyd.

Choice says mortgage holders with the big four banks can save up to $2500 a year, credit card holders up to $440 and depositors up to $330.

Mr Swan's package will give a leg-up to the smaller banks and building societies and credit unions most likely by extending a government guarantee to their borrowings and also by guaranteeing their deposits even after the government guarantee on all deposits expires late next year.

The Competition and Consumer Commission will be given a greater watching brief over banks, tasked with ensuring their fees are justified by their costs. It will also be given power to to regulate "price signalling" by banks, constraining what they are able to say to shareholders, the media or to other banks ahead of rate moves.

While stopping short of specifically regulating automatic teller machine fees in the way proposed by The Greens, the measure will empower the ACCC to investigate all fees and publicise its findings.

Greens MP Adam Bandt said he welcomed the "indication government is willing to take up our ideas," but wanted to see details.

"It should not be tempted to squib. The public wants something substantial and will not be happy with anything less."

The Treasurer's package will also ensure consumers get better information the point of sale with mortgage and credit card providers required to present them with accurate information as to the likely costs.

The package comes as the Senate prepares to grill Australian banks over their practices with Westpac chief Gail Kelly due to appear before the inquiry next week.

Published in today's SMH and Age


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Books for Christmas

From my other blog, Peter's Bookshelf:

Six months of panic - Trevor Sykes

Few Australian writers can match Trevor Sykes' understanding of the murkier waters of Australian business, as readers of his Pierpont column and his magisterial works The Bold Riders and Two Centuries of Panic have shown.

He has now turned his eagle eye on what has become known as the GFC, and the waves of panic that began with the subprime crisis in America and flowed with tsunami-like force across Europe, Asia and Australia. This was a crisis which was borne from an excess of greed, and immorality, and Sykes singles the Wall Street banks out for particular blame.

He explains how the subprime phenomenon came about, and how the fall of Lehman brothers marked the beginning of the slide. Inevitably the crisis reached Australia, with Centro and MFS the first dominoes in the chain. With the same blowtorch he earlier applied to the likes of Alan Bond he dissects the questionable dealings which caused the fall of high flyers like Allco, Babcock and Brown, ABC and many more, and summarises the pain and harm caused by the myriad small companies and individuals feeding from the frenzy.

Zombie Economics - John Quiggin

In the graveyard of economic ideology, dead ideas still stalk the land.

The recent financial crisis laid bare many of the assumptions behind market liberalism--the theory that market-based solutions are always best, regardless of the problem. For decades, their advocates dominated mainstream economics, and their influence created a system where an unthinking faith in markets led many to view speculative investments as fundamentally safe. The crisis seemed to have killed off these ideas, but they still live on in the minds of many--members of the public, commentators, politicians, economists, and even those charged with cleaning up the mess. In Zombie Economics, John Quiggin explains how these dead ideas still walk among us--and why we must find a way to kill them once and for all if we are to avoid an even bigger financial crisis in the future.

The Plundered Planet - Paul Collier

Paul Collier's The Bottom Billion was greeted as groundbreaking when it appeared in 2007. The Economist wrote that it was "set to become a classic," the Financial Times praised it as "rich in both analysis and recommendations," while Nicholas Kristof of the New York Times called it the "best nonfiction book so far this year."

Now, in The Plundered Planet, Collier builds upon his renowned work on developing countries and the poorest populations to confront the global mismanagement of nature. Proper stewardship of natural assets and liabilities is a matter of planetary urgency: natural resources have the potential either to transform the poorest countries or to tear them apart, while the carbon emissions and agricultural follies of the rich world could further impoverish them. The Plundered Planet charts a course between unchecked profiteering on the one hand and environmental romanticism on the other to offer realistic and sustainable solutions to dauntingly complex issues.

Sex, Lies and Pharmaceuticals - Ray Moynihan

Hard-hitting and provocative, this powerful expose of the birth of a new 'disease' - and the multi-million dollar machine unleashed to market - takes us inside the corridors of medical power from Paris to Melbourne to Manhattan to witness the creation of 'female sexual dysfunction' as a twenty-first century epidemic.

The characters in this corporate thriller are the global drug giants, the doctors and psychologists working with them, and the critics trying to untangle medical science from marketing who argue the new disorders of desire are a misleading and dangerous distraction from the real problems in sexual relationships.

I really really really really recommend each.



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Blue Christmas? Saving is nice until shoppers do it.

Retailers are bracing themselves for a blue Christmas after a shocking set of figures showing consumers were winding back spending even before the November interest rate hikes.

October retail trade figures show spending down 1.1 per cent in the month led by a 1.8 per cent dive in NSW.

In the year to October NSW retail spending climbed at a trend rate of just 2.2 per cent. By contrast employment grew 3.1 per cent and consumer prices 2.6 per cent, implying the amount spent per worker fell as did the amount of physical goods bought.

"It's reasonably alarming," said National Retailers Association deputy director Jennifer Cromarty. "We didn't expect a fall. We are not in any form of recovery at all."

The October retail figures build on the September quarter national accounts released Wednesday which show a near-record high proportion of household income was being saved rather than spent.

Savagely hit in October were spending at NSW cafés and restaurants which fell 9 per cent... spending on takeaway food which fell 3 per cent, spending on clothing which fell 6 per cent and spending on shoes which dived 21 per cent.

"It looks as if consumers were bracing themselves for rate rises in October even though they didn't get one," said Access Economics director Chris Richardson.

"Saving has become the new black".

Ms Cromarty said 60 per cent of the retailers surveyed by the Association expect a worse Christmas than last year. Most are defying tradition by offering specials before Christmas rather waiting until Boxing Day.

"They have already ordered stock for Christmas so they can't cut back, but they can decide to hire fewer casuals," she said. "That's what will happen unless things pick up in November.

The outlook for November is bad. The month began with a double interest rate hike adding $88 extra per month to the cost of repaying a $300,000 Commonwealth Bank mortgage.

"Energy prices are up as well," said Mr Richardson. "Although we spending less in shopping malls we are spending more on utility bills, more on mortgages and more on cars. Lower tariffs and the high dollar mean it has never been cheaper to buy cars. That's where much of our money has been going."

"Wage growth has been low, and in the last month we've made little more from either property or share market prices."

Treasurer Wayne Swan said it was "not surprising consumers are being a little bit more cautious with their spending given the global economic conditions we have been seeing".

"Our economic fundamentals remain strong, underpinned by envied job creation, a rapid return to surplus and a huge investment pipeline."

Mr Richardson said weak consumer spending would not derail the economic recovery.

"It'll come from business spending - and not from retail or tourist businesses either. The resources sector wants to spend half as much again next year as it did last year, and that was a lot. The Treasury has only factored in about half of it. The working assumption is they just won't be able to push the money out of the door as fast as they are planning."

Australia's trade surplus jumped from $1.8 billion to $2.6 billion in October led by strong increases in exports of gold and wheat as exports of iron ore and coal fell.

SHOPPING SHOCKER

NSW Spending, October

Liquor: down 2%
Clothing: down 6%
Shoes: down 21%
Department stores: down 2%
Takeaways: down 3%
Restaurants: down 9%
Books, magazines: up 7%
Pharmaceuticals, cosmetics: up 4%

ABS 8501.0, Seasonally adjusted

Published in today's SMH and Age





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What a difference revisions make

How the ABS saw history until Wednesday...

How the ABS saw history after Wednesday...

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Economic growth evaporates. But Swan says its okay.

It isn't, really

Australia has lost its mantle as a world-beating economy after a sharp drop in economic growth returned us to the middle of the international pack, cast doubt on the Reserve Bank's decision to lift interest rates, and raised questions about our reluctance to spend.

The slide in economic growth from 1.1 per cent in the June quarter to a threadbare 0.2 per cent in the September quarter pushed the Australian dollar to a low of 95.4 US cents. Had it not been for an extraordinary 21 per cent jump in farm production in the quarter brought on by the breaking of the drought the economy would have shrunk. Even so Australia's growing population sent output per person backwards.

Market economists mostly dismissed the collapse as a "hiccup" or a "speed bump" brought on the closure of three Queensland coal ports in the quarter holding up 2 million tonnes of coal, but the Bureau of Statistics also revised away much of Australia's previous economic growth, pushing down the annual total from 3.3 per cent to 2.7 per cent.

The changes slash household spending and dramatically lift saving pushing the proportion of income saved to 10.2 per cent, the highest in two decades with the exception of the jump during the handout of emergency cheques during the economic crisis.

"Of course there’s a fair amount of consumer caution," said Treasurer Wayne Swan. "People are still consuming, but obviously many people are taking the opportunity to pay off the credit card, to pay off the mortgage a bit more quickly."

"That’s hardly surprising given diet of steady news that’s come from Europe."

"The cautious consumer has appeared," said ANZ economist Katie Dean. "It's what the Reserve Bank was looking for."

"It tightened preemptively. If growth remains soft and consumers cautious, it may well stay on the sidelines until the second half of 2011."

Much of the relatively weak 0.6 per cent growth in household consumption was met by businesses running down stocks rather than lifting production. The behaviour suggests businesses as well as consumers are cautious, unwilling to plan on the basis of sustained economic growth.

With the exception of agriculture almost every industry either slowed or went backwards during the quarter including mining, construction, wholesale and retail trade and information technology.

Mr Swan said he expected things to improve and that it wasn't fair to make judgements based on one quarter.

"You don’t blow the final siren at quarter time in a footy game. The fact is that the outlook is really strong. I would caution against over-reading," he said.

Shadow Treasurer Joe Hockey called on the government to both "reign in its reckless spending” and to spend more on "essential infrastructure to improve productivity".

"Labor continues to shirk the hard decisions and refuses to do the heavy lifting," he said. "It is failing to capitalise on what is for Australia a very strong international environment."

Mr Swan pointed to a "huge pipeline of private investment," speaking as Rio Tinto approved a further $1.2 billion expansion of its Pilbara iron-ore operations.

Western Australia, Victoria and NSW have been responsible for the bulk of economic growth over the past year with spending in Queensland and Tasmania scarcely climbing.

Published in today's SMH and Age

TIM COLEBATCH:

If yesterday’s GDP figures are right, then the Reserve Bank has misread the economy, and given us interest rate rises we don’t read.

If the figures are wrong — and their startling revisions to 2009-10 data don’t inspire confidence — then they are just a bit of static we can disregard. But don’t assume it.

For once, Wayne Swan did not come out yesterday with graphs showing how Australia is leaving the ‘‘major advanced economies’’ for dead. And no wonder. All except France and Italy are now growing faster than we are.

With growth of 2.7 per cent, we are now being left for dead by Germany (3.9 per cent), Japan (4.1) and Korea (4.5).

But The real bottom line is growth in GDP per head. The Bureau of Statistics estimates it rose just 0.8 per cent in the year to September. It is still below 2008 levels.

How can that be when we’ve seen so much growth in jobs, our mineral exports are booming, and even after yesterday’s revisions, the Bureau of Statistics estimates that real national income grew 7.2 per cent in the past year?

Surely that makes us richer? Which means we spend more?

Well, some of us. The key to the puzzle lies near the back of the book, where the Bureau examines the sources of household income.

Over the past two years of crisis and rebound, it estimates, total wage income grew by just 7 per cent - including inflation, including all those 400,000 extra jobs.

Average income per employee grew just 3.6 per cent. Inflation grew 4.1 per cent. That means that on average, households depending on wage income are now marginally worse off.

Household income is growing: but the part of it that is really growing is the income of households who invest. Our income from profits, dividends, rent and interest shot up 16 per cent in the same two years. So households with significant investment income are much better off.

But investor households are more likely to reinvest their windfalls than spend them. That’s reflected in the Bureau’s stunning revision of its story on what happened in the last year. It has cut its estimate of household spending in 2009-10 by a cool $27 billion, and trebled its estimate of household saving from $23 billion to $68 billion.

Its picture of Australia’s growth now is extremely patchy. In the past year, almost half of all non-farm growth was in mining, mineral processing and construction. Most of the rest was in the finance sector and professional services (lawyers, accountants etc). The other two-thirds of the economy is growing little, if at all.

Many economists, inside government and outside, don’t believe this. They point to the stunning jobs growth of the past year, to the Bureau’s record of revising up past data, and dismiss yesterday’s figures as at most a ‘‘speed bump’’ on our road to the boom the Reserve predicts.

They may be right. But in my mind, these figures add to concerns that, as in early 2008, the Reserve may have misread the game. It has focussed on the needs of one industry in one state — mining in WA — when its job is to set interest rates for the entire economy. There is a risk that it has done too much, too soon.

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Reserve calls banks bluff

The Reserve Bank has dismissed claims by the big banks that their costs are climbing faster than the cash rate.

In a submission to the Senate banking inquiry the Reserve says the big banks' funding costs have moved "broadly in line with the cash rate" since mid 2009.

The submission is at odds with inferences drawn from the Bank's board minutes suggesting it believed over-the-odds rate rises were justified.

"Most of the increase in the major banks’ funding costs occurred during 2008 and early 2009, at the peak of the dislocation in markets," the submission says. "Since mid 2009 the major banks’ overall funding costs are estimated to have moved broadly in line with the cash rate, reflecting offsetting factors"...

Deposits have become more expensive for banks relative to the cash rate as has wholesale funding, but at the same time the cost of short-term debt has been falling, resulting in a steady cost of funds relative to the cash rate for over a year.

Regional banks' funding costs have been increasing more quickly.

The statement suggests the Reserve Bank does not believe the claim made by the Commonwealth Bank on Melbourne Cup day that it lifted its mortgage rate 45 points instead of 25 because of an increase in " wholesale funding and retail deposit costs".

Submissions from the big four banks are yet to be published on the inquiry website.

The Reserve said the major banks' total funding costs had climbed 90 to 100 points above the cash rate since the first rumblings of the financial crisis in mid 2007.

But the big four had more than made up for that by lifting their mortgage rates 120 points beyond the cash rate over the same period.

The Reserve expects the big bank's wholesale costs to climb from here on as cheaper long-term loans expire and are replaced by more expensive ones. But it expects the increased cost to be modest, "around 5 points over the next year."

Australian mortgages are not particularly expensive compared to those overseas with the markup over official rates "around the middle of the range of most other advanced countries.

While Australian bank profits are well above those in other countries, they are "similar to those of banks in other countries before the crisis" and similar to those of other major Australian companies.

Bank fees have fallen over the past year and mortgage exit fees are beginning to fall.

Credit unions and building now charge the lowest exit fees, of $364 for a $250,000 mortgage, followed by the big banks who charge $462 and the non-bank lenders who charge an average of $2066.

Particularly effective in reducing fee income have been new rules that allow the owners of automatic teller machines to charge users directly. As a result of the change customers are making fewer and bigger withdrawals, making more use of their own banks rather than other banks' ATMs and withdrawing more money at retail cash registers.

Published in today's SMH and Age

Reserve Bank Banking Inquiry Submission



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