Could the RBA’s aggressive rate hike cycle be over?
Welcome to Talking Business, a podcast produced in Melbourne Australia. The podcast is available on the Acast site, my own website, the Apple Podcast store or wherever you go to get your podcasts. Or you can get it at the Business Acumen website at www.businessacumen.biz or at Banking Day.
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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 27 in our series for 2023 and today’s date is Friday August 4.
First, I’ll be talking to Parry Laxman, the founder and CEO of Kangarama which is on a mission to incorporate innovation, functionality and sustainability to create ‘wearable safety’ scrubs. And I’ll be talking to economist Nicholas Gruen about the better ways of firms and super funds can invest in ESG and produce results for investors concerned with companies making good on the environment, social issues and governance.
But first, let’s talk to Perry Laxman
So what’s happening in the news.
The Reserve Bank has left interest rates on hold for consecutive months for the first time since it started raising them in May last year. The RBA’s cash rate target will remain at 4.1% following the board meeting. The cash rate has jumped from an historic low of 0.1% since the RBA started hiking 15 months ago — the steepest increase to borrowing costs on record. The cumulative effect of those rate increases appears to be biting in the economy, particularly for the household sector. A smaller-than-expected increase in consumer prices during the June quarter combined with an unexpected plunge in retail sales over June, has convinced the RBA that another rate rise was not warranted at this point in time. “The recent data are consistent with inflation returning to the 2-3% target range over the forecast horizon and with output and employment continuing to grow,” RBA governor Philip Lowe noted in his post-meeting statement. The RBA is currently forecasting inflation to be back below 3% by late 2025. However, Mr Lowe warned that the Reserve Bank was not necessarily finished with interest-rate hikes.
More electric cars have been sold in Australia during the first six months of 2023 than during the whole of the previous year, the Electric Vehicle Council, a lobby group, says. In a study released in July, the EVC said by the end of June, 46,624 EVs had been sold, nearly three times as many in the corresponding period in 2022. The best-selling EVs were the Tesla Model Y, Tesla Model 3, BYD Atto 3, MG ZS EV, and the Volvo XC40. The numbers sold are in the graphic below. According to the EVC, there are 91 models available for Australians to pick from, including both hybrids and battery EVs. The study also pointed out the number of charging stations: 967 high-power public charging stations, 558 locations, 438 fast charger locations and 120 ultra-fast charger locations
ANZ-Roy Morgan Consumer Confidence was up 3.2pts to 78.4 this week – to its highest for three months since late April. However, the index has now spent an equal record twenty-two straight weeks below the mark of 80 – equalling the all-time record of five months (twenty-two weeks) from September 1990 – January 1991 when the index was conducted on a monthly basis. Consumer Confidence is now 5.7pts below the same week a year ago, July 25-31, 2022 (84.1) and almost level, 0.1pts above the 2023 weekly average of 78.3.
Almost 100 companies operating on Australian docks and freight terminals are being monitored by authorities, who believe many of them were established as a cover for organised crime gangs to import record amounts of cocaine, other illicit drugs and illegal goods. As customs officers plan a fresh crackdown on the nation’s ports, Australian Border Force has revealed the size of the watch list compiled through Operation Jardena – its effort to identify and combat trusted insiders in the supply chain – has ballooned to about 1000 individuals and more than 90 businesses working at the border. Law enforcement agencies struggling to keep up with a massive uptick in cocaine shipments to Australia in the past year are set to partner with international customs authorities and businesses to gain access to real-time shipment data to increase efforts to disrupt drug smuggling operations throughout a “corrupted” supply chain of air cargo, baggage handlers, stevedores, freight forwarders and maritime crews. Australians are prepared to pay the highest prices in the world for cocaine, making it a lucrative market for powerful drug cartels. Throughout the past calendar year, there has been a series of large detections of attempted cocaine importations, both onshore and offshore. Border Forces officials had seized 4.5 tonnes of cocaine this year as of the end of April alone. The highest amount in any of the previous five years was 2.5 tonnes.
Australians withdrew nearly $7.8 billion from bank deposits in June, the first big drawdown since May 2021 and the largest on record, as interest rate increases and high inflation started to bite into savings buffers. While savings levels have proven a challenge for the Reserve Bank as it tries to return inflation to target, new data from the Australian Prudential Regulation Authority shows the most aggressive tightening cycle in a generation is starting to take a toll. While the country had $1.38 trillion on deposit in May, this declined to be closer to $1.37 trillion by June 30, according to APRA. But RateCity research director Sally Tindall said while it was further proof households are using savings to make ends meet, there is still a “giant buffer propping up” household budgets.
The latest NAB Consumer Insights Survey indicates that 43% of Australians experienced some form of financial hardship in the second quarter off the back of rising inflation and higher interest rates. This is a significant rise from a survey low of 29% in the first quarter of 2022. Not having enough money for an emergency remains the most common cause of financial hardship or stress and impacted 24% of people in Q2. Around one in five Australians overall also said hardship was caused by not having enough money for food and basic necessities or being unable to pay a bill. Noticeably more women, people under the age of 50, and people in lower income groups experienced these hardships in the second quarter. The most common type of payment missed was an electricity, gas or water bill (12% up from 8% at the same time last year), followed by a phone or internet bill (11% up from 8% in Q2 2022), a repayment on loans from family or friends (10% up from 7% in Q2 2022) and a credit card payment (unchanged at 9% but up from 6% at the same time last year). Slightly more Australians also missed a Buy Now Pay Later (BNPL) or insurance payment at 8%. The number of Australians unable to make mortgage repayments in the second quarter was unchanged at 6% despite rising interest rates. The survey also indicated that 34% of Australians believe ‘very much’ that money is a source of stress in their life and that 26% they are struggling to make ends meet. This was highest in the 30–49 age group with 42% stating that money was a source or stress. There was also a higher number of individuals in this age group struggling to make ends meet at 31% . The research also found that 28% of respondents felt that they could not manage a major unexpected expense at all. Around three in 10 felt they were not on top of their day to day finances or did not believe they were on track to have enough money to provide their financial needs in the future.
Australia’s most controversial coal mine has reached a major milestone, with the Carmichael operation of Bravus - the trading name of the Adani Mining – exporting its 10 millionth tonne of coal – but the company still plunged to a $365.7m loss last year despite record coal prices in 2022. The company’s accounts, filed with the corporate regulator, showed $232.9m of that loss was due to foreign exchange movements, with the bulk of that figure related to changes in the value of its $2.7bn worth of US-dollar denominated loans, which inflated in value as the Aussie dollar fell against the greenback. But the mine, which cost about $2.5bn to build, still booked a $132.8m operating loss for the year, with the Bravus-owned haulage company that moves its coal to port booking a $16.7m operating loss for the year.
David Jones and fashion stable Country Road Group have revealed a sharp slowdown in sales, blaming rising interest rates and a deterioration in trading conditions that is keeping customers away from stores. Cratering sales for the department store and the chains that sit within Country Road Group – Country Road, Mimco, Witchery, Politix and Trenery – paint a dire picture of the nation’s $400bn retail sector, which is facing an anxious consumer squeezed by cost of living pressure. South Africa’s Woolworths Holdings issued a trading update for the year to the end of June, warning of slowing sales momentum at David Jones, which was sold earlier this year to a private equity firm for $100m, and the Country Road Group which it still owns. It blamed wilting consumer confidence caused by Reserve Bank rate hikes for the worsening growth, with saw the formerly robust sales growth at DJs and Country Road Group nearly grind to a halt in the six months to June.
In recent weeks some of the world’s largest renewables developers have started to become more cautious about committing to huge offshore wind farms. Surging costs have foiled ambitions by Sweden’s Vattenfall, Denmark’s Orsted and Spain’s Iberdrola for major projects in markets much more mature for offshore wind than Australia. But none of this appears to have dampened the enthusiasm for turning Victoria’s sleeping Gippsland into the next global hotspot for the industry. Enthusiasm for what is regarded as an area with a virtually unparalleled combination of attributes – from an untapped “world-class” wind resource to shallow waters and nearby grid connections, as well as a clear need for more dependable clean energy – remains unabated. “Offshore wind is the next frontier; the energy transition can really bring new life into the region,” says Carolyn Sanders, head of operations at Japanese-owned Flotation Energy, which is planning the $6.5 billion Seadragon project 20 to 40 kilometres off the coast between Paradise Beach and McGauran Beach. She is among those that say a spate of cost inflation which has derailed planned projects in the United Kingdom, United States and Taiwan among other countries should be less of an issue here. That’s because more developed markets have prices for power generated from proposed offshore wind farms locked in from previous years which do not take into account the surge in costs felt by the sector more recently.“In some other regions of the world, the low-hanging fruit – the really good sites for offshore wind – have already been developed,” Sanders says. “I think the first projects in Australia are going to need some price support … but we expect that as the industry establishes we will see that come down.” Star of the South, also off Gippsland, is the country’s most advanced offshore wind project. Its chief executive, Charles Rattray, says rising costs are a broader issue, and emphasises the region’s “ideal location” for offshore wind. “Cost pressures are impacting everyone, including energy,” he says. The CSIRO’s latest generating cost report, released this month, found costs rose by 20% on average across all technologies in the year to June 30. It estimated offshore wind costs at between about $85 and $170 per megawatt-hour of output in 2030, compared with as low as about $45 for onshore wind, but much lower than nuclear. Seadragon and Star of the South are among 37 proposals under consideration by the designated regulator for huge offshore wind farms off the coast of Gippsland, the first region to be declared an offshore wind zone by Energy Minister Chris Bowen in December. That number is expected to be whittled down to five or six by late this year, pointing to a likely period of jostling, negotiation and consolidation between competing ventures as powerhouses such as Macquarie, Shell and local players Origin Energy ensure they capture a slice of the action.
In late May, shortly after PwC entered full damage control amid its tax leaks scandal, the firm’s acting chief executive, Kristin Stubbins, asked Richard Gregg to join her and another senior partner, Marcus Laithwaite, on a video call. There, Gregg, a partner at the firm specialising in the government’s research and development tax incentive scheme, was told he was on leave and prohibited from contacting his colleagues, clients or accessing his files. He was not told why he was on leave, or for how long he was expected to stay away from the office. There was, he knew, an investigation into how extensive the use of the confidential draft information on anti-tax avoidance laws plans had been inside PwC, although it was unclear who was conducting those inquiries. What Gregg he did not know at the time, but would learn a little more than a month later, was that he was on course to become a casualty of the firm’s push to dump many of its tax partners and senior leaders, whether they were directly linked to the tax leaks scandal or not. Even worse, the firm would unceremoniously, and without warning, name him in a media release as one of eight partners being “exited” for “professional or governance breaches”. Gregg’s outrage over his treatment led him to become the first partner being ousted from the firm to take legal action. Last Wednesday he successfully obtained a temporary injunction preventing the firm from forcing him to “retire from the partnership of PricewaterhouseCoopers”. Gregg’s legal representatives argued that he was not given enough information, or valid reasons, as required under the firm’s partnership agreement, about why he was being exited. They also argue he had nothing to do with the tax leaks matter. PwC’s representatives now concede the attempt to fire Gregg is not related to the misuse of government information. They say he is being forced out for earlier issues with the advice he was providing to clients as part of a program to change the culture within the firm’s tax division.
Home loan interest rates charged by the major banks to new borrowers are outpacing official cash rate increases, as lenders shift from writing mortgages at below the cost of capital to safeguarding profits and dividends. The country’s largest four banks have lifted the rates offered to new customers by 0.32 percentage points more than the Reserve Bank’s official rate rises since the start of the year on basic home loan products, according to data provided by Finspo, a mortgage broker. That is a significant turnaround from the cut-throat pricing last year, when those rates increased by an average of only 2.77 percentage points, 0.23 percentage points less than the central bank’s 3% in rises. Aggressive mortgage discounting last year pointed to banks attempting to grow their loan books at all costs, but lenders more recently have been recouping margins to bolster earnings. This is applying additional pain to mortgage-holders, who are now paying $29,200 more a year on a $1 million loan since the central bank started lifting rates in May last year.
Michelle Levy, who led the recent Quality of Financial Advice Review, has raised questions on the suitability of big superannuation players offering financial advice as industry superfunds seek to expand their role in the sector. Just weeks after the government surprised the industry by cherry picking the review in favour of big super, Ms Levy says: “I worry this is the wrong place to start.” She has also raised the issue of deepening risk if super funds expand into the financial advice sector. “What is proposed might be too much and too hard and expose members to risk,” she said. Under plans outlined by Finance Minister Stephen Jones, staff at big super funds – such as industry funds – will be able to work without the same educational and ethical qualifications required by existing financial advisers. But Ms Levy has now openly doubted the capacity of big funds to deliver financial advice as planned. “It’s going to be really hard to get it right,” she explains. Major super funds have already come under criticism for poor service levels and for holding onto member funds for longer than necessary.
Ben Roberts-Smith’s key supporters at Seven West Media have been forced to hand over thousands of documents showing their involvement in the former soldier’s failed defamation case as the Nine-owned newspapers at the centre of his lawsuit pursue his wealthy backers for legal costs. Federal Court Justice Anthony Besanko on Monday rejected a bid by Seven West Media chairman Kerry Stokes, Seven Network commercial director Bruce McWilliam and others to resist handing over documents to Nine showing communications with Roberts-Smith’s lawyers during the case against The Sydney Morning Herald and The Age.
Billionaire mining magnate Gina Rinehart’s father Lang Hancock exaggerated his personal role in the discovery of rich Pilbara iron ore reserves and downplayed the role of others, the West Australian Supreme Court has been told. That was the assessment of lawyer Jeremy Stoljar SC, who recounted to the court a business meeting in May 1972 between Mr Hancock and his associates at the time, including prominent businessman Don Rhodes. Mr Stoljar is representing the Rhodes family company DFD Rhodes, which has joined the mammoth legal battle between Ms Rinehart’s Hancock Prospecting and Mr Hancock’s late former business partner Peter Wright’s family and their company Wright Prospecting. The Wright family is claiming billions of dollars in royalties and equity from the Hope Downs mines and deposits in the Pilbara region. The Rhodes family also wants a cut, claiming they have a right to1.25% of royalties from Hope Downs, owned and operated by Hancock Prospecting and Rio Tinto, because of a 1969 agreement between the parties. Mr Stoljar was trying to demonstrate that his client had an important role in the early years of iron ore exploration and development, not just Mr Hancock or Mr Wright. In the May 1972 meeting, which was recorded, Mr Stoljar said Mr Hancock told the others the meeting was about fighting efforts by the state government to confiscate some of the Hope Downs tenements from them. “I may have at various time shot my mouth off,” Mr Hancock told the others at the meeting about his discussions with the government and his role in developing the iron ore reserves.
The number of Qantas passengers disgruntled about refunds, being unable to access $400 million worth of credits issued since the pandemic, poor service and flight cancellations continued to soar in 2022, as pressure mounts on the government to act on competition in the aviation sector. A draft document from the Airline Customer Advocate that has been held back from release since April, showed the number of complaints about Qantas was sharply higher than pre-COVID-19, even though passenger numbers were much lower. The ACA said eligible complaints rose to 1426, but it received a total of 6918 complaints from customers in 2022. Qantas alone accounted for a disproportionately high 4000 of the total, followed by its subsidiary Jetstar, Virgin Australia and Regional Express. “This [number of eligible complaints] represents an increase of 138% on the previous year … with complaints relating to COVID-19 impacts, flight delays and cancellations, refund requests, and fees and charges representing the biggest areas for customer dissatisfaction in 2022,” the ACA said. While the advocate, which is funded by the airlines, said the increase was to be “expected based on the increased volume of passenger numbers with the lifting of COVID-19 restrictions in Australia and internationally”, it was higher than 2018’s 1410 eligible complaints and 2135 total enquiries.
And it’s the profit reporting season again. Credit Corp reported a 5% fall in profit to $91.3 million. Royalty investment company Deterra has recorded $73 million in mining royalties in the latest quarter, taking its financial 2023 figure to $229 million. Insurance group PSC now expects to deliver $111 million in earnings in the 2023 financial year. Travel agency Helloworld has upgraded its full-year earnings guidance to between $42 million and $45 million. Bunnings landlord BWP Trust has reported a 1% decline in full-year profit. Net profit was $36.7 million, including $76.9 million in unrealised losses on properties.
And that’s it for this week. And next week, I’ll be talking to Barb Hyman, the founder and CEO of Sapia.ai, an AI-driven recruiting program being used by some of Australia’s biggest companies. And I’ll be talking to CommSec chief economist Craig James about what’s ahead in the market.
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
