Economists say US can weather ongoing crises, but recession remains on the table
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I am Leon Gettler. My job is to review and monitor the week’s news in business, finance and economics. I bring it all to you, every week.
This is episode number 17 in our series for 2023 and today’s date is Friday May 26
I’ll be talking to I’ll be talking to Rowan Wilde, the Co-Founder of Australian fintech HelpPay, which is designed to help financially distressed Australians navigate the cost of living. And I’ll be talking to Indeed economist Callam Pickering about the latest jobs figures.
But now let’s talk to Rowan Wilde.
So what’s happening in the news.
US business economists are optimistic that the banking and debt ceiling turmoil won’t turn into full-blown crises; however, a majority of them also believe a recession is still in the cards — although likely starting later than previously thought, according to a new survey released Monday. About 59% of 42 economists surveyed by the National Association for Business Economics earlier this month said they believe it’s more likely than not that the United States will enter a recession in the next 12 months, according to the May NABE Outlook, which provides a consensus macroeconomic forecast from dozens of professional economists. While that share is largely unchanged from surveys conducted in February and December 2022, the latest forecast shows a further kicking of the can down the road in terms of when a recession could start. In February, the majority of economists said a downturn could start in the first half of the year; now, that’s shifted to the third quarter or later. There was, however, greater consensus on inflation, the Federal Reserve’s rate-hiking counterattack, banking turmoil and debt ceiling uncertainty. More than half (55%) of surveyed economists believe the debt ceiling will be raised, 42% believe the debt ceiling will be suspended, while 3% believe the United States will default on its debts. The biggest negative year-ahead risk cited by a plurality of respondents was “too much monetary tightness.” Since March of last year, the Fed has engaged in a ratcheting up of monetary policy, raising its benchmark interest rate 10 consecutive times in an attempt to slow down inflation. The NABE economists expect that inflation will continue to moderate; however, a majority of respondents believe it’ll take until 2025 or later for the Fed’s primary inflation gauge (the core Personal Consumption Expenditures index) to reach the 2% target. The economists surveyed expect interest rates to remain elevated through the rest of the year, and nearly half expect that the Fed will start cutting rates in the first quarter of next year.
Facebook owner Meta Platforms Inc. was hit by a record €1.2 billion ($US1.3 billion) European Union privacy fine and given a deadline to stop shipping users’ data to the US after regulators said it failed to protect personal information from the American security services. The social network giant’s continued data transfers to the US didn’t address “the risks to the fundamental rights and freedoms” of people whose data was being transfered across the Atlantic, the Irish Data Protection Commission said on Monday. On top of the fine, which eclipses a €746 million EU privacy penalty previously doled out to Amazon.com Inc, Meta was given five months to “suspend any future transfer of personal data to the US” and six months to stop “the unlawful processing, including storage, in the US” of transferred personal EU data.
Victorians with investment properties and holiday homes will be among those hardest hit by an Andrews government budget attempting to rein in debt and fund its infrastructure program with a multibillion-dollar tax grab. A land tax hike will catch 860,000 property investors, holiday home owners and commercial property owners and reap the government $4.7 billion over four years. Victorian Treasurer Tim Pallas said the COVID-19 debt levy would hit “those most able to pay”, extracting $3.9 billion from businesses with payrolls above $10 million and $4.7 billion from property investors over the next four years. The levy will remain in place for a decade, taking the total additional tax collection to more than $20 billion. While businesses with a payroll of over $10 million will also have to pay an extra $3.9 billion over four years. Despite the tax increases, Tuesday’s budget revealed Victoria’s debt will continue to rise to record levels. Net debt will lift from $135.4 billion next financial year to $171.4 billion by 2027, the equivalent of 24.5% of the economy. The state’s net debt is on track to hit $116 billion by the end of next month, $31.5 billion of which can be attributed to spending during the pandemic, about a quarter of the overall bill. Government belt tightening, including the cutting of 4000 public service jobs in the next financial year, will save $2.1 billion over four years.
Suppliers will be required to notify federal public servants if their personnel are pinged for bad behaviour, a tightening of rules made in response to the PwC tax leaks scandal. The new “notification of significant event clauses”, included in an update to procurement rules published on Friday, also covers the provider’s ability to deliver on a promised service. The updated Department of Finance rules also remind public servants they “must consider … a potential supplier’s relevant experience and performance history when assessing value for money.” “The clauses require a service provider to notify the entity managing the contract immediately upon becoming aware of any adverse findings made by a court, commission, tribunal or other statutory or professional body regarding the conduct of the service provider or its capacity to deliver the agreed services,” the rules now state. The changes are part the government’s still-emerging response to a scandal which involved a breach of trust between the nation’s largest consulting firm and its biggest client, the Commonwealth. Internal firm emails published by a Senate committee at the start of May reveal dozens of PwC partners and staff received emails relating to a plan to exploit, for profit, information a former partner had gleaned while advising the government on developing the multinational tax avoidance laws. In response, Finance Minister Katy Gallagher said she was looking to address gaps in existing procurement rules to stop a repeat of the breaches, while Treasurer Jim Chalmers has vowed to beef up the power of the Tax Practitioners Board, the agency that uncovered the malfeasance, and other still unspecified action. Assistant Treasurer Stephen Jones said Treasury is investigating and is weighing referring the matter to the Australian Federal Police. The enhanced rules have been released amid reports of an informal ‘go-slow’ by public servants when it comes to awarding PwC winning new work or contract extensions in Canberra. It is also happening as politicians, experts and lobby groups call for the firm to be banned, for a period, from government work. PwC has won contracts worth $537 million across the federal government during the past two years. Former senior bureaucrat Andrew Podger, who also supports a ban on PwC winning Commonwealth work, said the new rules will help public servants make informed decisions about buying services.
Inflation for grocery staples from peanut butter to pork chops is outpacing price rises for almost all other goods in the nation’s shopping trolleys, even pushing up the cost of Australians’ morning scrape of Vegemite. Analysis by UBS economists shows food inflation is running at 9.6%, well above the overall inflation rate of 7%, with the shelf prices for goods such as Vegemite up 8%, Bega peanut butter up 9% and some types of yoghurt up 12%, The UBS research, which tracks more than 60,000 prices of grocery products at Coles and Woolworths every month, found fresh food prices had climbed by 9.9% in the year to April, while dry grocery goods were up by 9.4%. But there are signs that prices for fresh food may be starting to ease, albeit remaining at an elevated level. Cost-of-living pressures on Australians have intensified due to the combination of soaring inflation and increases in interest rates by the Reserve Bank aimed at bringing it down.
A profound sense of gloom has overtaken consumers in Australia and the United States as they dig in for a lengthy period of stubbornly strong inflation and interest rates at levels not seen for more than a decade. Consumer confidence has crumbled even though the jobless rate in both countries continues to hover close to record lows. But even though consumer sentiment has clearly soured, it’s not yet bad enough to force central banks to contemplate cutting interest rates. That means that the big question for investors is whether this pervasive pessimism will make consumers cut their spending much more viciously in the second half of the year. This would precipitate an abrupt economic slowdown, given that consumer spending is the main driver of economic growth and possibly even produce the interest rate cuts that financial markets continue to expect. Judging by the University of Michigan’s latest sentiment survey, US consumers have settled into a dour mood, with the index tumbling 5.8 points to 57.7 in May. Australian consumers are no more cheerful. The latest Westpac-Melbourne Institute survey shows consumer sentiment dropping 7.9% , from 85.8 in April to 79.0 in May Consumers, it appears, were deeply disheartened both by the Reserve Bank’s surprise decision to lift interest rates in May, and by the Federal Budget’s failure to provide more relief for struggling households. As Westpac chief economist, Bill Evans, said: “Consumer sentiment is back near the historic lows we have only really seen on a sustained basis in the deep recession of the early 1990s.”
Australian mining and energy companies could get expanded access to billions of dollars’ worth of subsidies from US President Joe Biden’s signature Inflation Reduction Act, under deals to grant special status to the country’s defence manufacturing and critical minerals industries. The plans were announced after Prime Minister Anthony Albanese met Mr Biden on the sidelines of the Group of Seven summit in Japan, where the leaders of the world’s major industrialised economies were also united in strong condemnation of Chinese economic coercion and Russia’s invasion of Ukraine. Mr Biden also announced he would ask Congress to define Australia as a domestic source for sectors deemed critical such as defence, critical minerals and clean energy. While details were sketchy, the leaders said the move could make sectors like energy and rare earths a third-pillar of the alliance. It means Australian companies in areas such as hydrogen could get access to US subsidies and other benefits under the US Inflation Reduction Act (IRA) without having to leave Australia. The federal government expects Australian energy firms to benefit directly from the deal, including through new loans for the production of batteries and energy systems. The act extends provisions for US firms through mechanisms including the US-Australia Free Trade Agreement, allowing commodities such as lithium to qualify for grants. Mr Albanese told parliament on Monday that having the US treat Australia as a domestic supplier under the production act would allow “our industries to benefit from the Inflation Reduction Act” and create “big opportunities for Australia to build our renewable energy industry and create jobs, including in the hydrogen sector”. The prime minister’s remarks give the impression that Australian firms would directly tap into the $US369 billion Inflation Reduction Act – a vast program of subsidies, production credits and tax sweeteners passed into law last year to spur US-made renewables, transport and energy development.
Buy now, pay later providers will face tough new regulations that will require groups to comply with responsible lending obligations and other consumer safeguards as part of a government crackdown on the sector. The new regulatory regime, to be announced on Monday by assistant treasurer Stephen Jones, will affect several groups, including Afterpay and Zip. Under the new laws, buy now, pay later products will be classified as credit products, meaning operators will have to comply with the National Consumer Credit Protection Act and hold an Australian credit licence. The new laws will also require providers to have processes to handle dispute resolution and hardship claims. The new laws will also seek to stamp out unacceptable marketing by the groups and require groups to show their products are suitable for their users.
Australia needs to substitute ethanol in fuel and offer significant tax breaks to renewable fuels if it wants to reach its international climate targets, including net zero by 2050, a new report has found. After the Albanese government flagged that it would introduce fuel efficiency standards next year to cut transport emissions, a new report by Biofuels Australia has recommended a string of new measures, including setting a target of 10% renewable fuels by 2030. Other recommendations include maintaining and extending the fuel excise mechanism to renewable fuels, as well as low interest government loans to renewable fuel start-ups. Bioenergy Australia chief executive Shahana McKenzie said renewable fuels were the missing piece of the puzzle when it came to reducing emissions in Australia. The new report by consultancy firm Deloitte says the development of a mature biofuels industry over the next decade could add up to $10 billion in gross domestic product a year and deliver 26,000 new jobs.
A failure to lift productivity will make access to healthcare more expensive, with the sector lagging behind the national average, Medibank has warned. Australia’s biggest private health fund has called for more partnerships between insurers, hospitals and governments to eliminate silos that have restricted innovation and created inefficiencies in the sector. McKinsey found Australia’s healthcare system had averaged annual productivity growth of 1.9% in the seven years through to 2022, lagging other key industries. This is despite it recording the biggest increase in employment, with an annual growth rate of 4.8%. Agriculture and manufacturing both surpassed healthcare, recording productivity growth rates if 9.2 and 3.7% respectively, while both sectors’ workforces shrank by 1%. Meanwhile, the Reserve Bank has become increasingly worried that flatlining productivity will make it harder to achieve inflation targets without higher rates.
Unions will be given special access rights, including inductions that exclude management, to foreign workers brought in to fill aged care staff shortages under migration rules backed by the Albanese government. The government’s first labour agreement for temporary skilled workers in aged care, announced last week, includes a memorandum of understanding that features seven pages of union access conditions and expanded labour market testing. The aged care labour agreement at Curtin Heritage in Perth is set to deliver 570 staff over five years. It is the first step in what has been called a grand bargain with unions to allow the fast-tracking of low-paid migrant workers into the country to ease workforce shortages in aged care. But migration agents and aged care employers have warned that some providers are baulking at the MoU, labelling it as union overreach that will prevent providers signing up. Under the MoU, management is expressly barred from attending the inductions unless they are invited by the union and “make a positive statement about the relationship with the union and the ongoing commitment to work together”. There is speculation the model will be extended to other sectors that have used labour agreements, including hospitality and the meat industry.
The National Disability Insurance Scheme has already exceeded full-year participant forecasts that were released just months ago, and the program is experiencing strong enrolment rates among children with autism as it hurtles toward 1 million participants. There were 592,059 participants in the NDIS as of March, according to the National Disability Insurance Agency’s (NDIA) latest quarterly report, released late on Friday afternoon. With about 200 people joining the scheme every day, the NDIS is likely to have breached its 2022-23 financial year forecast of 592,294 participants in the first week of April. On current trends, the NDIS will have 610,000 participants by June 30, about 3% higher than projections released by the scheme actuary in November. If enrolment rates hold steady at 6000 monthly sign-ups, the program will exceed its June 2024 projection of 646,000 participants by December this year. The NDIA forecasts that the program will have more than 1 million participants by 2032 and cost close to $100 billion annually. It said the increase in children with developmental delay and autism entering the scheme had been more than expected
One of Australia’s largest mining companies says the government’s proposed same job, same pay policy would cost the organisation up to $1.3 billion a year and would threaten jobs if rushed through parliament. The federal government is seeking feedback on the workplace reform, which it plans to legislate later this year, that would see labour-hire workers paid at least as much as directly employed workers doing the same job. Employment and Workplace Relations Minister Tony Burke hit back at BHP’s costings given the policy is not yet finalised. BHP said it supported the government’s goal of protecting vulnerable workers, but said in a submission that the same job, same pay (SJSP) policy in its current form would seriously affect its operations, harm productivity and risk the future of all forms of labour hire. “BHP estimates the financial impact of SJSP to our Australian operations will be up to $1.3 billion annually. This cost is equivalent to the labour cost of approximately 5000 full-time employees across our operational workforce,” the company said.
And that’s it for this week. And next week, I’ll be talking to Jim Penman, the founder of the franchising company Jim’s Group which has had a strong growth over the last two years. And I’ll be talking to RMIT economist Jonathan Boymal about house prices.
In the meantime you can catch me on Facebook, Twitter, Instagram, LinkedIn and YouTube. And if you want leave a comment. For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business on the Apple podcast store or on my website leongettler.com.
If you want to contact me, email me at leon@leongettler.com. I answer all emails.
Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week
