We have heard a lot this week from both sides of the political fence about policy change and approaches that could have a positive influence on small business and young entrepreneurs in Australia but it remains to be seen if any such policies can or will be delivered before or even after the federal election.
Let's see what +Greg Canavan has to say about the global markets and China....
MARKETS
By Greg Canavan •
July 4th, 2013
The demand for easy money is a powerful one. Europe’s
austerity drive (also known as living within one’s means) has hit a few road
blocks — again. Portugal has had enough and the political situation there looks
shaky. As a result, government bond yields shot up to 8% yesterday.
Germany has had to give Greece another clip around the ear
for not adhering to its reform program, and is (once again) threatening to
withhold the next tranche of bailout money unless Greece gets on with it.
And the situation in Egypt is volatile, with the army having
just booted out the one-year old government of President Mursi following mass
protests against his rule.
But that’s all happening on the other side of the world.
There’s quite a bit going on here too. This week, a deluge of data on the Australian
economy gave us a few big clues as to where we are headed.
Let’s start with retail sales, which came in at just 0.1%
growth for May, versus expectations of a 0.3% increase. Earlier this week, a
survey of manufacturing activity showed improvement in the industry but with a
reading of 49.6, it’s still shrinking, just at a ‘less fast’ pace (anything
below 50 reflects contraction).
Yesterday saw the release of the services sector survey, and
it wasn’t pretty, coming in at 41.9. According to the release:
‘Businesses in most household-oriented sub-sectors are yet
to report any signs that recent interest rate cuts have helped boost sales.
Personal & recreational services was the only sub-sector in this group to
expand in June. The activity indices of the retail and hospitality sub-sectors
both suggest that activity declined further in June and, in three month moving
average terms, are at their lowest levels this year.’
So both the services sector and the manufacturing sector are
in recession, and have been for some time. And yesterday we got renewed
confirmation that the mining construction boom has peaked, with the Australian
Bureau of Statistics (ABS) reporting a 3% fall in the value of engineering
construction work over the March quarter.
So what’s the good news? Well, new homes sales increased
1.6% in May after rising 3.2% in April. The growth is coming off a very low
base so nothing to get excited about, but this could reflect a reengineering of
the state government based first home owners grant.
Most states have, or soon will, only offer a first home
owners grant on newly built homes. This should stimulate housing construction
far more effectively than the old grant, which was on existing homes too.
Moreover, the old grant was effectively a transfer of cash from taxpayers to
home vendors and a completely useless stimulus measure.
By far the most intriguing release of the week was the trade
data, which showed that Australia recorded a seasonally-adjusted trade surplus
for May of $670 million, well above forecasts.
The driver of the surplus was a big increase in the export
of iron ore and coal. And it all went to China,
with exports to the country up a large $718 million. In fact, Australian
exports to China hit a record high in May.
We are now more dependent on the Middle Kingdom than ever,
with 35.6% of our exports heading to Chinese ports in May.
But isn't China slowing down?
Aren’t they supposed to be cutting back on steel production and debt-fuelled
infrastructure spending?
Yes they are, but it’s not showing up in the data yet. While
China’s growth may be slowing, that’s not to say its construction boom is too.
Projects that got underway last year or earlier this year will still be
completed. Despite the efforts of the central planners, property prices are
still rising in China, which throws off the false signal to build still more.
So demand for iron ore remains strong, evidenced by the
large export volumes and robust price (it’s still just under US$120 per tonne).
But this is a lagging indicator. The tight liquidity seen in
China’s financial markets recently is a better indicator for what is to come.
That is, financial markets are starting to allocate capital much more prudently
and this will eventually work its way into the real economy.
The finance for an apartment block (no doubt approved by
local bureaucrats for a tidy sum) will not be found so readily in the future
now that the People's
Bank of China (PBoC) have made it clear they won’t be providing
torrents of liquidity at the first sign of trouble.
The landscape has changed in China, and that is not yet
reflected in the trade data. But we think it will be.
The stock market is a proven leading indicator and if you
look at the performance of Rio Tinto this year, it perhaps provides a clearer
sign of where the iron ore market is headed.
As you can see from the chart below, Rio (one of the world’s
largest iron ore producers) rallied from $50 to $70 last year on hopes that a
new stimulus program in China would keep the iron ore party
going. It did that, but only for a few months.
During 2013, the share price has gone back to the $50 mark
in anticipation of lower prices and/or weaker demand. At these levels Rio looks
cheap if you think China’s demand for iron ore will remain strong.
But if you think that China's economic rebalancing hasn’t
even started yet, then Rio is a value trap.
And if that does turn out to be the case, then recession fears could well become reality towards the end of this year.
That’s because strong trade data boosts economic growth via
a positive net export figure. If this positive influence on GDP fades as the
year progresses (and we think it will) the economy will slip towards stall
speed and unemployment will continue growing at a faster rate.
Which means the dollar, and interest rates, will continue to
fall.
Unless of course you think low interest rates will lead to
another house price boom and higher consumption via the ‘wealth effect’. That’s
what Glenn Stevens’ is hoping for…but it’s all about confidence.
His speech yesterday was an interesting one, in which he
talked about confidence being an ingredient of economic growth. For example:
‘Turning to the current conjuncture, it can be observed, in
conventional expenditure accounting terms, that some key areas are well placed
to expand once they have the confidence to do so…
‘The second thing to say is that much depends on
‘confidence’ – that intangible thing that is hard to measure and very hard to
increase. We are talking here about confidence that the future will be
characterised by growth, that there will be customers for products, that
innovations are worth a try, and so on. That confidence seems pretty subdued
right now.’
We would suggest that confidence is a symptom, not a cause,
of current events. When people see squabbling children with giant egos running
the country, central bankers experimenting with money and getting it wrong, and
white collar crime on a grand scale with little to no consequences, no wonder confidence
is low.
And the way things are heading, confidence won’t be
improving anytime soon.
PS: Happy Independence Day to all our US readers!
Greg Canavan
for The +Daily Reckoning Australia
for The +Daily Reckoning Australia
REAL ESTATE
Rick Otton Urges
Aussies Suffering Mortgage Stress to Look At Property Options
Real estate millionaire, Rick Otton, has seized on a
think-tank’s new report that reveals increasing numbers of Australians suffer
from negative equity and mortgage stress. Mr Otton says traditional property
investment strategies are no longer working and it’s time for serious property
investors to adopt more creative ‘no-money-down’ methods if they wish to gain
financial freedom. Read more...
Experts Blow Prices
Out Of Proportion
Most property commentators over-emphasise median prices and
the fact that they continually use this as their yardstick for assessing the
condition of the property market is worrying, claims one advisory group.
“Far too much commentary about residential property these
days focuses on price. Very little is actually said about sales,” argued
Michael Matusik, head of property advisory group Matusik Missive.
Matusik said that ...continue reading
Interest is Skye high
from Asian apartment investors
THE fall in the dollar will boost apartment sales to
offshore investors as a raft of new projects are launched across the country,
according to developers.
Asian investors, who have ploughed hundreds of millions of
dollars into the Australian residential market in the past year, are expected
to capitalise on the dollar's fall from a high of almost $1.06 in January to
its present level of about 92c.
"The weakening of the Australian dollar creates
stronger buying power for foreign investors," said William Young, Lend
Lease's regional sales director, Asia, who is based in Singapore.
Mr Young said foreign buyers ...continue reading
SME
Gen-Y young guns
taking their shots
ENTREPRENEURS aged in their late 20s defied the global
financial crisis to emerge as an unexpected powerhouse of the Australian
economy.
An analysis of the nation's entrepreneurs has revealed the
rate of growth of Generation Y workers who employed others outstripped the
overall employer population.
However, entrepreneurial activity generally was not badly
hit in Australia by the GFC, with the number of people in the workforce who
owned and managed a business that employed others increasing by 3 per cent
despite the tough conditions.
A study of census data by The Australian's social editor
Bernard Salt found that ...continue reading
Australian start-ups
expect strong growth this year
Compared to more established SMEs, start-ups worked less
hours for better financial reward last year and are more confident about this
year’s revenue performance, according to Australia’s largest accounting
software provider.
The MYOB
Business Monitor report, based on the recent survey conducted by
Colmar Brunton, compares the attitude, results, intentions and expectations of
Australian businesses less than two years old with that of their peers.
In the year to February 2013, start-up businesses reported
stronger revenue performance than ...continue reading
Research finds women
business owners not paying themselves a wage
Research by the Australian Women Chamber of Commerce and
Industry has revealed the majority of women small business owners do not pay themselves a
wage.
The survey results released yesterday from an AWCCI study of
3000 female respondents showed 50% of the businesses required more capital to
grow.
It also found a large majority of women start a business
with under ...continue reading
Until the next time...
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