September 2009

Posted 7 September 2009

Economists around the world are calling Australia the ‘wonder from down under’ having dodged another recession bullet with GDP growth of .06% in the June quarter, twice what many forecasters expected. That leaves us with 19 straight years without a technical recession and the only developed nation not to go into one during the GFC. But before I launch into more eco babble let’s define a few things. The Gross Domestic Product or GDP measures a nation’s economic growth and the value of all the goods and services it makes in a year. To give you some perspective, Australia’s annual GDP has averaged around 3.6% for the past 15 years or so and, while still way below past trends, the latest figures compare well to the average 4.6% contraction recorded by the G7 economies over the same period. For the record, the OECD just revised its economic growth forecast for the G7 nations this year to an average -3.7%, up from the -4.1% it predicted in June. To enter a technical recession you need two quarters in a row of economic contraction, or negative GDP. Although we had a negative figure in the December quarter, we have not had another.

ust ask Treasurer Wayne Swan and the June quarter GDP growth was much ado about stimulus in fact he said the word stimulus 37 times during his 29-minute media conference about the results. Thanks to the cash splash disposable household income went up by 2.3%. This figure was also helped by low lower interest rates which, according to ABS statistics, reduced the amount of household income absorbed by interest payments to 9.1% – it was14.4% this time last year. In the business sector the small and medium business tax incentives drove strong investment and introduced a broad trickle-down effect for the whole economy. Specifically the treasury estimates most business investment growth was drawn from the legions of company cars purchased to take advantage of the tax incentives.

Looking ahead now and as the effects of the cash splash start to fade, the much-touted infrastructure programs should pick up the slack and provide us with more enduring and positive growth. Also the government will probably use its better-than-expected fiscal position as a springboard for a more concerted attack on that nasty budget deficit. In other words, it looks like Australia’s green shoots are starting to flower.

In other news…

Overall this beautiful set of numbers is likely to see the RBA and Treasury revise up their economic forecasts. The good news is these figures add to the general sense of confidence that the Australian economy has weathered the global storm very well and that the government’s deficit will be smaller than predicted in the May budget. However, the bad news, according to NAB’s Group Chief Economist Alan Oster, is that rates will probably go up as early as November. Alan had previously tipped two 25 basis point increases in February and March but now reckons they’ll come in November and December followed by another 25 basis point increase in February.

Posted 1 September 2009

We are by nature herd animals, skittish of prey, comfortable in numbers etc. This instinctive urge to move in large numbers, acting in the same way at the same time is especially apparent in finance and economics. Big market trends generally begin and end with buying or selling frenzies. Herding behaviour, driven by emotion, is mostly irrational – fear in the crashes, greed in the bubbles. But right now the herd is quietly grazing on the green shoots of a possible recovery. The worst global recession since the 1930s may be over and, while much weakened, national economies are starting to turn good. In an effort to spur the herd on I present to you the UBank international green shoots round-up.

Let’s start in the US where a report just out shows tentative signs of a stabilising housing market with the biggest jump in existing home sales there in years. Job losses are also slowing and most economists are tipping for US output to actually grow between July and September. And all this comes just as Ben Bernanke, the US Federal Reserve Chairman, suggests the US economy has nearly bottomed.

Over on the continent Germany and France, Europe’s two largest economies, have officially emerged from recession having recorded annualised growth rates of just over 1%. In the UK retail sales over the past three months are up 1.2%, the best result since May 2008.

Meanwhile, in our own neck of the woods, Asia’s emerging economies, led by China, have revived rather faster; in fact in the second quarter ’09 some of them have recorded annualised growth rates of over 10%. In the rest of Asia Japan has just moved out of recession, growing by 0.9% and South Korea GDP growth is strong and getting stronger.

Back at home the Australian economy remains resilient and exports are remarkably strong. In general, conditions are better than expected and business surveys and consumer confidence continue to rise. Construction work done in June shows a slower pace of decline and while unemployment will probably rise from its present 5.8%, it’s likely not to reach the May budget’s forecast of 8.5%. Plus with Goldman Sachs predicting a global commodity shortage on par with 2008′s to kick in next year the future is looking rosy for our already strong exports.

In other news …

Further to our interests in Burgernomics, a recent report from UBS offers an interesting insight into how long you need to work on the average net wage to earn enough to buy a Big MacTMacross 73 cities. Chicago, Toronto and Tokyo are the best places for fast-food addicts where it only takes 12 minutes’ work to afford a Big Mac while in Mexico City, Jakarta and Nairobi it will take you over two hours of hard toil for a fatty fix.

Posted 25th August 2009

Is it just me or is this the recession the horticulturalists had to have? There’s the green shoots, there’s the yellow weeds in the green shoots and of course there’s the woods that we are not out of yet. The economy had been a verdant rolling pasture of budding economic data until the other day when Australian Treasury Secretary Ken Henry entered the room. Dr Henry, who is also a board member of the Reserve Bank, started up his two-stroke Victor motor mower this week and lopped the tops off the green shoots by raising the possibility of a second global shockwave lurking around the corner (for the visual among us that would be a W graph). ‘It’s possible that there will be a second shockwave,’ the good doctor said. ‘There’s no reason to think it will be anything like the first shockwave in size and intensity – it won’t be – but there could be a second shockwave to hit us and that too could have implications for future growth.’

And he has a point.

Last Wednesday the world’s stock markets took a battering with a very bad showing in China that sent the Dow Jones US Index, the widely adopted measure of the US stock market, down 186 points. Which is a lot. This comes despite claims by many US economists that the recession there is already over. However, take a closer look at the latest US data and frankly signs of an enduring recovery remain elusive. As Nouriel Roubini (the guy who called the whole sub prime mess first) wrote in Forbes the other day, ‘Data from the US – rising unemployment, falling household consumption, still declining industrial production and a weak housing market – suggests that the US recession is not over yet. A similar analysis of many other advanced economies suggests that, as in the US, the bottom is quite close, but it has not yet been reached. Most emerging economies may be returning to growth, but they are performing well below their potential.’

Roubini reckons the United States will clamber out of recession at the end of this year, but like Dr Henry, he thinks it could fall back into a ‘double-dip’ recession that would drag us down with it. What all this means for the average household is, like everything at present, uncertain. But if we did have another economic drop the good news is interest rates would stay on hold if not go down ever further as the Reserve Bank tries to stimulate demand. However, the bad news is employment may go up from its present figure of 5.8%.

I’m off to plant a few green shoots of my own.

In other news …

The Reserve Bank Board has just released the minutes from its August meeting during which it flagged a possible rate rise due to fears inflation is not falling as fast as it had hoped. However in the next breath it expressed concern that such a move could hurt confidence and thus hamper our green shoot recovery. So stay tuned on that one. Meanwhile the Board also noted that it’s still unclear how much of the greater than expected buoyancy of our economy is due to Rudd’s stimulus package.

Posted August 2009

To fix or not to fix? That is the question. Do you punt on interest rates going up and fix in your rate now or bet the house on rates staying low and stick with a variable loan? While I am not in the position to give advice, I have put together some background information to help you make up your own mind.

First, some definitions.

A fixed home loan is taken out at a fixed rate for a fixed period with the most popular being five years. Having a fixed rate is good for people on a strict budget and/or seeking protection from a rising interest rate market. However, breaking one can cost tens of thousands in penalties and mostly they don’t allow extra repayments.

A variable loan on the other hand is not fixed; it is subject to the ups and downs of the market and is driven by Reserve Bank policy in managing the economy. This is good if interest rates drop, because so do your repayments, but if interest rates rise, then so does your interest bill.

The Reserve Bank uses interest rates to control economic activity. It raises them to keep the inflation genie square in its bottle and drops them to stimulate demand and investment. Right now the average bank interest rate is pretty low at about 5.2% so there’s a fair bit of wriggle room upwards. But the question is when will it rise and by how much? Crystal ball anyone?

Here’s the latest economic news to help make an informed choice.

In its recent quarterly Statement on Monetary Policy, the Reserve Bank expects Australia’s economy to actually grow by 0.5% this year, leading many economists to expect rates to rise earlier than they previously figured. This renewed optimism and hence interest rate speculation is due to two things: March quarter GDP showing 0.4% growth after a 0.6% decline for December and rising consumer and business confidence. Citing all this, the bank has reiterated interest rates are unlikely to fall any time soon and most economists are now tipping rate rises for the middle of next year (although Westpac’s chief economist, Bill Evans, has been more hawkish and has tipped February.)

A few scenarios to consider.

To help, here are three scenarios which compare a $250,000 with a 25 year term over a 5 year period.

Scenario 1 – Fixed Loan for five years. At the moment the average fixed five-year rate across the major banks is 7.45%p.a.*. According to this scenario total repayments will be $110,361.29 and total interest will be $89,553.36.

Scenario 2 – Variable Loan 1
Assumes a starting variable interest rate of 5.17%p.a.* and 75 basis point rise every six months – a total of nine increases throughout the term.

Start of year 1 – 5.17%p.a.
Start of year 2 – 6.67%p.a.
Start of year 3 – 8.17%p.a.
Start of year 4 – 9.67%p.a.
Start of year 5 – 11.17%p.a.

According to this scenario the average interest rate will be 8.54%p.a., total repayments will be $120,261.66 and total interest will be $101,987.85

Scenario 3 – Variable Loan 2
Assumes 100 basis point rise every 12 months.

Start of year 1 – 5.17%p.a.
Start of year 2 – 6.17%p.a.
Start of year 3 – 7.17%p.a.
Start of year 4 – 8.17%p.a.
Start of year 5 – 9.17%p.a.

According to this scenario the average interest rate will be 7.17%p.a., the total repayments will be $106,880.14 and total interest will be $85,156.53

Posted July 2009

Wow what a ride! Over the past year the Aussie dollar’s journey has been tumultuous to say the least. At one point it lost over 38c over three and a half months, going from it highest ever spot at US98.49 cents in the middle of July 2008 to a five-and-a-half-year low of US60 cents in October 2008. People were talking US parity one day and US paucity the next. But as they say on late night TV ads, ‘wait there’s more!’ because the Aussie just closed above $US0.8350 and it looks like the only way is up.

There are heaps of reasons behind this but the most obvious is geographical. Over 60% of Australia’s exports go to Asia, so the fortunes of the Aussie dollar are increasingly tied to the region, and specifically to our number one trading partner China where things are looking up. China’s GDP grew unexpectedly strongly at 7.9% in the second quarter of this year and it is throwing hundreds of billions of dollars at infrastructure that needs Aussie metals. So it’s not rocket surgery to see that as things improve in China they’ll need more stuff out of the ground from us to build more stuff on the ground for them.

Another reason is our relatively high interest rates. Put simply, investors are putting their money in our banks because we have higher interest rates than just about any other country (US Fed Reserve rates will hover between 0% and 0.25% for a while yet according to Fed Chairman Ben Bernanke)

The other thing behind the AUD rise is not so much the AUD strength but USD weakness. Basically, the shine has come off the US economy as a safe haven as it struggles against the GFC. By contrast, Australia looks peachy. We’ve yet to enter a technical recession, interest rates are relatively high, unemployment remains steady at 5.8% and as the global economy starts to emerge from recession (and there’s little doubt it is) everyone will want our commodities.

While all this makes the AUD an attractive prospect for investors, what does it mean for you? Well for starters that vintage 1940s five-string bakerlite banjo from Cletus in Alabama that you’ve been eyeing off on eBay is getting cheaper every day. Also if you’re thinking of travelling to the US you can get heaps more Graceland memorabilia bang for your buck. Add to that the ongoing airline price war and you gotta ask yourself ‘will there ever be a better time to see Elvis’s Jungle Room?’ As for the long-term, well with those commodity billions hopefully flowing into our economy, employment and job security will improve as will consumer demand, which means more prosperity for us all.

And in other news … as picked by most commentators, the Reserve Bank has kept official interest rates on hold at 3%, but look closely at its statement and you’ll notice its dropped references to ‘scope for further easing’. In other words further rate cuts are now looking less likely because of the recent strong upswing in consumer and business confidence as highlighted last week in our analysis of NAB’s June quarter Businesses Confidence Survey.

Posted July 2009

This week we’re delving into the meaty finance chunks of NAB’s June Quarterly Business Survey. Being a survey of around 1000 small to large-sized, non-farming companies, it’s probably Australia’s most comprehensive look at current business performance and how business feels about the future.

Overall the news is good. The survey recorded its first quarterly improvement since the 2008 March quarter with improvements across trading and profits, employment and general expectations. However, these figures are still pretty weak against the historical performance and the survey does warn that this may be temporary so don’t count your chickens yet.

On the employment front things are getting ‘less bad’ with the pace of job shedding slowing but hours worked cut back. NAB number crunchers still reckon unemployment will hit 7% by end 2009 and 8% by late 2010 – currently it’s 5.8%, so that’s around 80,000 more Aussies out of work by late 2010. Not surprisingly, the biggest falls for hours actually worked were in industries most affected by the global meltdown like mining, construction, manufacturing and transport. People in recreation worked the least mainly due to punters having less to spend in pubs and clubs but thanks to the cash splash the retail sector has kept people relatively busy.

Meanwhile Australian business confidence has soared to its highest level since the start of the world economic crisis. While this won’t directly affect you now these things do eventually trickle down. As businesses starts to employ more people and buy more machinery to make more stuff there’s more money around so we buy more things. This all multiplies the amount of money in the system which means better job security for one and all.

With the economy holding up better than expected NAB reckons the RBA will keep interest rates on hold and watch and wait for a bit longer yet. However, this will depend heavily on what happens between now and the end of the year particularly if things start to pick up in China as they buy so much of our exports and exports bring money into the country. BTW the survey sees plenty of evidence that things in China are picking up.

So all in all not a bad outlook, but let’s hope these green shoots don’t get eaten by a black swan event.

In other news …

Unlike employment, which is pretty slow to react to both improvements and downturns, the stock market is pretty sensitive to all developments. So with the Australian share market nearing nine-month highs after 10 day’s straight market gains to Wednesday 29 July there may be reason for some quiet, rational exuberance. To give you some perspective, on writing this, the All Ordinaries just closed down a tad to 4148.90, which is still a long way up from the 3111.70 low on 6 March, 2009.

Posted July 2009

Well quite a lot actually but more on that later.

As some of you may already have read, Australia just recorded its lowest annual inflation rate since the end of 1999 and it’s the first time it’s gone below 2% annually since 2007. By way of background, inflation is measured by the Consumer Price Index, which measures the quarterly changes in the price of things – if prices inflate, go up or deflate, go down. The Australian Bureau of Statistics (ABS) works out the CPI by quite literally measuring the price of a ‘basket’ of the goods and services we buy the most of like, petrol, food, clothes, shoes, education, phone bills and beer (or a crisp chardonnay if that’s your tipple.) For the record the biggest rises over the quarter were for petrol (3.6%), hospital and medical services (3.6%), rent (1.4%), furniture (3.7%) and house purchases (0.8%).

So all this means that the price of fish will stay pretty much the same (as with oysters or even abalone).

And now to the elephant in the room – how does all this affect interest rates? According the minutes of the Reserve Bank’s July board meeting, our central bank reckons inflation will keep low for quite a while yet so it’s going to keep interest rates low too. In fact the bank feels that with all this great inflation news it may even need to drop rates a tad more. FYI the Reserve Bank raises interest rates when inflation goes up to slow down the economy so things don’t get too crazy. In other words, when rates are high people can’t, or don’t, borrow as much, so there’s less money in the economy and therefore less is spent on goods and services, which drives down prices – deflation.

The minutes of the meeting also revealed that, between tea and biscuits, the board members agreed the global economic downturn may be bottoming out, particularly in the US and China. As for Australia, well we seem to have dodged another bullet in the GFC barrel. Perhaps we can reword treasurer Paul Keating’s famous utterance from the early 1990s from ‘the recession we had to have’ to the recession we nearly technically had, but haven’t quite really had and maybe won’t? Or something like that.

In other news …

On the Burgernomics front The Economist magazine has just released its latest Big Mac™ Index. This uses the price of the ubiquitous McDonald’s™ meal to work out how much a Big Mac™ costs in different countries. Apparently the US dollar buys the most burger in Asia with a Big Mac™ in China costing half what it does in the US. Businesses based in continental Europe have the most reasons to be cheesed off; it seems they have uncompetitive currencies. The euro is almost 30% overvalued and the Swiss franc is one of the world’s dearest currencies.

Recession? Moi?

You wouldn’t usually think of Poland and South Korea when you think of classic Aussie bed fellow but think again. The recent release of the national figures that measure these sorts of thing has our economy growing by a faster-than-expected 0.4 per cent in the first three months of this year. This pulls us out of the jaws of technical recession and as such we join our new best mates Poland and South Korea as the only economy in the industrialized world not to fall into a recession care of the global financial crisis. Perhaps you ought to throw a few hand fulls of Polish cabbage and some Korean sushi on the Barbie to celebrate?

But I digress…

So what is a technical recession and why should we care? No one really knows which boffin coined it but it’s largely accepted wisdom that a technical recession is when you have two quarters in a row of economic contraction i.e. our economy shrinks and things go south. The term we use to measure an economy’s growth is the Gross Domestic Product (GDP) which is the market value of all the final goods and services a country makes in a year. FYI Australia’s GDP is slightly higher than the UK and Germany and has averaged around 3.6% over the past 15 or so years, so nice one people and well done ball boys.

So with the economy growing by a faster-than-expected 0.4 per cent in the first three months of this year we have escaped having two quarters of what Kevin Rudd calls “negative growth” in row. Mind you we’ve escaped that by the hair of our chinny chin, chin as 0.4% is a pretty small beer compared to China which hovered around 10% for years until the whole shebang turned sour.

OK now for the slightly heavy bit. With out getting to complex the major contributor to the March quarter “growth” was the fact that we imported less and exported more. And as a few commentators have pointed out imports fell because companies aren’t importing as many widget makers and flim flam machines they were before the wheels came off. So err sorry but it’s a little premature to say we are out of the forest yet but hey enjoy the good vibes while they last.

But for now dear readers go forth and bask in the sun light of prosperity, oh yea and do a spot of frock shopping to help out the retail sector while you’re at it.

Melbourne’s leading satirical journal….honest!

www.buglecorp.com

This first appeared on the opinion pages of The Melbourne Age

Join Winnies War and mind your language!

Winston Churchill may be well known for the battles he waged in the name of the Allied Forces but it is the lesser know war he declared on the desecration of the English language that still rages. At the height of the Battle of Britain with war all round him Churchill barked out an edict banning bureaucratese, legalese, officialese, jargon and other gobbledygook in favour of plain English. To him it was the fastest method of conveying concise, unambiguous messages to command.

As a practising plain English editor and writer, I can assure you this battle is ongoing and it is coming at us on many fronts from the supermarket shelves to the corridors of our national capital. It is fed by intellectual vanity, fear of looking dumb, pesky lawyers (of course) and a general public that has been bludgeoned into submission by its heavy, dull, self-important pedantry. This enemy of clarity and friend of the obscurantist feeds off our numb acceptance of it in our everyday lives.

Speaking of pesky lawyers, here’s a sample of something I recently had to turn into plain English for a reluctant law firm. “The conditions of chapters 13 and 14 shall with modifications deemed as necessary extend and apply to and in relation to this Section and others, without affect to the aforementioned in the sense of its generality, in particular with the modification that any reference to plastic or plastic products shall be construed as a reference to rubber products also in full. (58 words) Still awake? My solution was “what chapters 13 and 14 say about plastic and plastic products also applies to rubber. (15 words)”. Say no more!

Just as you can’t turn a sow’s ear into a silk purse neither should you be turning nouns into verbs. For those out there who practise these verbal gymnastics I have “benchmarked” your attainment and have decided not to “calendar” you a meeting so “access” your information on your way out my door before I “task” you a spanking. Mind you, it can sometimes work, for example US visionary Buckminster Fuller once described, “God as a verb not a noun, proper or improper”. Mind you he didn’t go on to say “I God you” but you get the drift.

Then there’s the buzz word salads that slink across my desk and curl up in the corner staring their evil stare. Buzzword users like to hide in the vagaries of big words. They use “realise” rather than do “facilitate” rather than “make easier” or my pet hate “utilise” rather than “use. These jumbled assaults on my beloved English seem designed to intimidate, depersonalise and divert the reader from the fact that the writer has no answer. Scratch the surface and you are in free fall for these battalions of nothingness often carry no precise meaning at all. A case in point is the following blast of corporate waffle I edited as part of an annual report for a finance client. “By analysing and validating strategies moving forward we can better ascertain our total customer satisfaction base and thus better empower our interactive competency team process.” In other words “closely monitoring strategies teaches us more about customer satisfaction and improves our team work.”

Not surprisingly, however, it is the bottom line imperative that will probably drive companies and governments to take up plain English. Recent US research demonstrates that Australian business may be losing as much as $2 billion a year through unclear communication which equates to about 35,000 jobs. This is based on a US survey of 3,000 customers about the promotional material they are emailed and mailed. It was found that up to a third were simply boycotting products that came with bad writing, costing the US economy about $10 billion per annum.

However, it’s not all bad news as the recent stoush in the US over Facebook’s user agreement demonstrates. The company took a public relations belting after the blogosphere raged at it for making changes to its user agreement without notice and without it really being clear what the changes were. The main problem was changes to two sentences that gave Facebook a licence over any content even after you’ve deleted your profile. In an amazing turn of events for a modern corporate, Facebook is taking bold steps to recraft its Terms of Services agreement into plain English. If this goes ahead, and if Facebook users start to demand the same plain English language of the other companies, it might set an important new precedent for all consumers. After all, real consumer choice doesn’t exist unless we can read, understand and then act on information we are presented with. In the words of Albert Einstein, “everything should be made as simple as possible, but not one bit simpler.”