HUGE relief to the RBA Board. Australia’s Q2 headline CPI inflation in line with market expectations.
The big surprise was trimmed mean inflation. It undershot expectations to come in at 3.9%, down from 4% in March.
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.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
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 2024 and today’s date is Friday August 2
First, I’ll be talking Fred Thiele, the Chief Information Security Officer at Interactive. We’ll discuss how businesses can mitigate risks associated with AI.
And I will talk to Rabobank economist Michael Every about why the Chinese Communist Party Third Plenum told us nothing about China’s economy and how it can be fixed.
But first, let’s talk to Fred Thiele.
So what’s happening in the news?
The economics of hosting the Olympics, like those we’re now seeing in Paris, are challenging and loss-making. Ten of the 13 summer games until 2016 had resulted in losses, and all of them ran over budget. Recent research by Alexander Budzier and Bent Flyvbjerg at Oxford University estimates that each Olympiad overshoots its original budget by an average of 195%). In Paris the figure is projected to be 115%. As the Olympics have grown, they have attracted more media interest and larger pots of sponsorship money. At present the IOC still retains the bulk of the games’ earnings from broadcasters and sponsors. Broadcast revenue rose from $2.2bn in the 1993-96 cycle to $4.5bn in 2017-21 (at 2021 prices), while top-tier sponsorship jumped from $480m to $2.3bn over the same period. Major sponsors of the Paris games include LVMH the French luxury empire. But costs have grown even faster than sponsorship has. In 1924 the Paris games cost around $9m in 2022 prices; this time the estimated cost is around $9bn. The Parisian organising committee, however, will almost certainly need to stump up more because of overruns. The private sector will foot most of the total bill through the IOC, partner firms, tickets, licensing and more. All this hardened public opinion and led to International; Olympic Committee (IOC) changes. The IOC’s reforms are a welcome start. But more could be done in future to make the games easier to host. One idea is to spread the Olympics out. Different cities in different countries could host different events. For economists this is the surest way to cut costs: more places spending on events would mean a smaller bill for each. And a multi-city model could also help assuage local concerns by reducing the pressure on any single host.
Major Democratic donors are already flocking to Kamala Harris, and they say the main reason is straightforward: She’s not Joe Biden. Her presidential campaign raised more than $200 million in its first week, and the Democratic super PAC Future Forward said it had received $US150 million in commitments after Biden bowed out. The wave of big-dollar donors, which is defying predictions that the vice president would not be able to appeal to the party’s fundraising class, has been particularly noticeable because of some donors’ previous aversion to giving to a president they saw as a doomed candidate. Donors says that with Harris assuming Biden’s spot at the top of the ticket, they are now more willing to support a Democratic presidential candidate again. Some were also motivated by their desire to beat GOP nominee Donald Trump. It’s still early days, but so far the stream of money has been so strong that one donor adviser has even cautioned some donors to slow down until the dynamics of the race make it clearer where money is most needed. Venture capitalist Bradley Tusk had decided not to donate significantly to Biden’s reelection campaign — but with Harris as the Democratic candidate, he said, he planned to give at least $100,000 to back her. With Biden at the top of the ticket, he reasoned, the funding would not have paid off, but Harris’ chances were markedly better than Biden’s. And unlike the president, Harris wasn’t “falling asleep” or giving “crazy answers.” “I understand why people might grumble, and she might not be their first choice,” Tusk said. “But in reality, it comes down to this, which is: Do you want Trump back or not? And if the answer is no, there’s now a candidate that is viable.” And while Harris’ identity as a Black and South Asian woman may have at one time caused doubts among that traditional donor base, her candidacy also brings in money from new corners of the party. Among South Asian donors, enthusiasm for Harris’ rise to the top of the ticket has been “off the charts,” said Raj Goyle, a former Kansas state representative who bundled for Barack Obama’s 2012 campaign and co-founded Indian American Impact, a voter mobilization nonprofit. “I think people have tried for years to use her biracial identity and her multi-ethnic background as a criticism, whereas I think many of us view it as a strength,” Goyle said. Biotech venture capitalist Neil Exter conceded that Harris probably would not have been his first choice to lead the ticket. Nobody knows “whether she will be a good candidate for the next 100 days or not,” he said. Still, if need be, he would give money to support the ticket because at this point, he said, Democrats do not have a choice. “I wouldn’t be giving her money because of who she is — it’s rather, I’m giving money because I really don’t want Trump to be president,” he said.
Australia’s annual inflation lifted to 3.8% in the year to June, from 3.6% previously, to land broadly in line with expectations ahead of the next interest rate meeting. The Australian Bureau of Statistics said it was the first annual increase in the consumer price index since December 2022. On a quarterly basis, inflation rose 1% in the three months ended June, the same as in the March quarter, and was in line with economists’ expectations. The all-important data release sets the scene for the Reserve Bank of Australia’s interest rate meeting next week, amid concerns it could be enough to trigger another interest rate hike. Yet the annual trimmed mean, the central bank’s preferred measure of underlying inflation, undershot expectations to come in at 3.9%, down from 4% in March.
If you think then inflation figures are bad news, then wait for this – regional towns fear they will lose services, tourists and workers if Rex Airlines is grounded, as the nation’s third biggest airline went into voluntary administration on Tuesday night. Ernst and Young were brought as administrators of parent group Regional Express Holdings late on Tuesday night, after a Rex trading halt on Monday shook the aviation sector. Regional flights will still operate, but Rex’s capital cities flights will be cancelled and Virgin has offered to cover flights for those passengers affected. “Virgin Australia has made an offer for Rex customers with an existing ticket on a flight cancelled due to the administration process the opportunity to transfer their ticket free of charge to the 13 overlapping Virgin Australia services,” EY said in a statement late on Tuesday. “Rex and Virgin Australia are also exploring opportunities to support regional customers, which include Virgin Australia selling Rex’s regional services through codeshare or interline arrangements, and making Velocity Frequent Flyer benefits available to Rex’s regional customers.” The airline flies dozens of routes across the continent that are not serviced by other carriers, piggybacking freight on to passenger flights and delivering an essential service to towns scattered throughout outback Australia. ASX-listed Rex was put into a trading until Wednesday amid concerns the airline is on the brink of collapse after its costly expansion into major city routes. The board met on Tuesday and agreed to go into administration. Customers were still able to book flights on Rex services for regional destinations on Tuesday, but community leaders were anxious about what the carrier’s future would hold. Shaun Radnedge, mayor of Murweh Shire in southwestern Queensland, said Rex played a vital role in providing connectivity with the rest of the country. About 12 Rex flights touch down in Charleville every week on a milk run from Brisbane to Birdsville, bringing locals returning from a trip to the city, workers, government agents, tourists, mail and supplies. Many of the passengers rely on the airline, which operates subsidised trips in partnership with the Queensland government, to take them to medical appointments in Brisbane or Toowoomba. Like many councils in western Queensland, Murweh Shire has a partnership with Rex to provide cheaper fares for residents and guarantee regular flights. The council itself relies on the airline to bring in accountants and other key workers who are not based in Charleville. “As far as our rural communities go, this air contract to bring people to communities is our lifeblood,” Mr Radnedge said. “It offers us opportunities not only for work, but medical transport and things like that. It is a vital service. It’s a similar story in the central West Australian town of Carnarvon, 900km north of Perth, where a nine-hour drive can be shortened to a flight of one hour and 45 minutes. Merome Beard, who represents the electoral district of North West Central for the Liberal Party in the West Australian parliament, said her office had been inundated with calls from community members worried about the fate of the airline. “It’s critical, absolutely crucial for lots of reasons,” Ms Beard said. “With limited health services locally, people travel all the time for health, business meetings and also for family and socialising. Not everyone is in a state where they can travel (by car).” Ms Beard said Rex’s troubles had highlighted vulnerabilities in regional areas that had been subjected to years of diminishing access to important services, including healthcare. “Regional health services have been depleted and that has exacerbated the need for air services,” she said. “It’s connectivity. It’s a necessity in the regions. It affects future economic development as well. Without air services it makes it hard to bring new people and businesses to the area.” Tourism towns around Shark Bay are also reliant on Rex services to carry visitors, while agricultural businesses around Carnarvon need the flights to bring in agronomists, valuers and other specialist workers not based in the region. Rex flights also deliver boarding students to and from school in the south. Rex flights are a mainstay of Mornington Island, in the Gulf of Carpentaria, where planes arrive daily from Cairns and Mount Isa. They’re so popular, that locals book travel weeks in advance to make sure they get a seat. Aside from chartering a private boat or plane, the Rex flights are the only way on or off the island, which is home to about 1100 people, and services are regularly booked out. Doctors, nurses, school teachers, police officers, government agents and construction workers rely on Rex flights to get to and from the island. Transport Minister Catherine King told the ABC: “We think Rex is a pretty important part of the Australian aviation industry and stand ready to work with them to see whether there’s any assistance or anything the Government needs to do. “We think very clearly it’s important to keep regional aviation and regional connectivity.” Starting out as a purely regional airline, Rex expanded into domestic services in competition with Qantas, Virgin and Jetstar during the Covid pandemic when it leased nine Boeing 737s. The expansion has been blamed for the company’s decline. Rex’s most recent results for the six months to December 2023, showed its regular public transport operations had lost more than $25m, or almost $1m a week.
Australia’s top companies face lower profits this earnings season, which starts this week and runs until August 30, as a cocktail of high interest rates, elevated costs and economic uncertainty puts the brakes on strong growth. Company results for the 2024 financial year are expected to show further signs of household stress, particularly in a soft fourth quarter, with at-home consumption outperforming out-of-home. Market forecasts are for an average profit fall of 4% among ASX companies over the 12 months to June 30, compared to the previous period. Analysis from stockbroker Morgans shows forecast earnings per share (EPS) growth for the financial year has slid to 6% from previous expectations of 7%, while it expects the S&P/ASX 200 will return to steady earnings growth of 5.8% in FY25, and 7.8% for EPS. Jun Bei Liu, lead portfolio manager of Tribeca’s Alpha Plus Fund, said this coming reporting season would be one of the softer reporting seasons in recent times. “Company revenue will be under more pressure and margins will continue to move lower, given the slowing economic activity and higher inflation,” she said.
New Workplace Relations Minister Murray Watt has predicted it will take years for the CFMEU to fully reform itself, saying he was shocked and disturbed at the alleged widespread infiltration of the union by organised crime. Senator Watt said he was briefed by his department about the looming application by the Fair Work Commissioner Murray Furlong to place a number of the CFMEU’s construction divisions into administration. If the union indicated it would oppose or seek to frustrate the application, he reiterated the government would be prepared to introduce legislation to ensure the administration proceeded. Senator Watt said it was likely Mr Furlong would seek administration for a set period of time and if legislation was required, one of the issues to be considered by the government would also be the length of the administration period. I think it’s likely to take years to fully reform the CFMEU and make sure that it’s delivering on its promise to represent its members,” he said.
The chief executives of Australia’s biggest healthcare companies have sat down with the Albanese government to report on the crisis facing the country’s private hospitals. The diagnosis was grim. Hospital operators say the $22 billion sector is at a crunch point. Soaring costs and wages, and tanking patient numbers since the COVID-19 pandemic, mean many of the country’s 650 private hospitals are losing money. Maternity and mental health services are the hardest hit due to high specialist fees and out-of-pocket costs. More closures are looming. However, the hospital operators are at loggerheads with health insurers who fund the system and who believe hospitals need an overhaul to make them more efficient. Health Minister Mark Butler has launched a review of the sector with findings due next month. He has asked players to submit detailed financials as part of the inquiry, which is designed to identify pain points and work out whether reform is needed. Butler’s people said reports about the sustainability of some private hospitals are concerning, particularly those in regional areas and where they play an important role in the local community. The probe has inflamed tensions between hospital operators who want government help to keep facilities open, and health insurers who fear their record profits make them an easy target. The insurers also fear they could be forced to increase their funding for hospitals. This is playing out publicly with St Vincent’s, the country’s largest non-profit hospital group, threatening to walk away from its contract with health insurer NIB. The government’s biggest fear is private hospital closures will heap pressure on an already overburdened public system. There are also implications for investors with billions of dollars invested in both publicly listed health providers, including Ramsay Health Care and private equity backed Healthscope, which has been in negotiations with its lenders to restructure $1.6 billion in debt for months. The pandemic was the turning point for private hospitals around the world as patients stayed home and surgery was postponed. A post-pandemic surge in costs including wages, higher interest rates and a switch by patients to day surgery, in-home care and online consultations has exacerbated losses. Industry players point to a 28.4% pay rise for Victorian nurses over four years approved in June as an example of the “outrageous” cost increases facing the sector. At the same time, insurers are enjoying a renaissance after years of losses. The money they paid in claims sank during the pandemic and a record number of Australians took on private insurance, although there are early signs numbers could drop off due to cost of living pressures. However, claims and counter-claims made by vested interests are clouding the process. There are the operators themselves, who range from listed companies to private equity and church-backed not-for-profits. Insurers, state governments, unions and powerful interest groups representing GPs, surgeons and others also have a say. Many of those who briefed the Health Department secretary Blair Comley at meetings this week are pessimistic about finding a cure.
And that’s it for this week.
And next week, I’ll be talking to Paul Koopmans, the Australia New Zealand vice-president of Worldplay on the growth of digital wallets which are projected to grow by 45% in Australia of all e-commerce transactions by 2027 as cash and card use declines. The use of digital wallets at point of sale (POS) terminals is projected to double from 15% in 2023 to 30% of the POS market size of $789 billion in 2027.
And I will talk to AMP Capital chief economist Shane Oliver about the latest inflation figures.
For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from my website leongettler.com.
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Wishing you all a safe and healthy week, And looking forward to bringing you Talking Business next week.
