The Albanese government surprises some by seeking advice on scaling back negative gearing.
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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 35 in our series for 2024 and today’s date is Friday September 27.
First, I’ll be talking to JobAdder’s Chief Product Officer, Joel Delmaire about the risks to business and community of using AI and what sort of regulation is required to ensure community safety without hampering innovation.
And I will talk to Indeed economist Callam Pickering about the latest unemployment figures and what they mean for the Reserve Bank of Australia.
But first, let’s talk to Joel Delmaire.
So what’s happening in the news?
Michael Feroli, JPMorgan’s chief U.S. economist, was one of the only forecasters on Wall Street who accurately predicted the Federal Reserve’s half-point rate cut last week, and he sees the same thing happening again. Central bankers will meet again Nov. 6-7, and Feroli expects another 50-point reduction, though that’s conditional on the next two job reports showing more weakness. Job gains that come in stronger, however, would seal the deal for the Fed’s “goldilocks scenario” of quarter-point cuts at the November meeting and the one in December, he added. Investors are spilt nearly evenly between 25 points and 50 points for the November meeting, according to CME’s FedWatch tracker. And the so-called dot plot of Fed officials’ forecasts suggests they anticipate two quarter-point cuts by year’s end. For his part, Fed chair Jerome Powell cautioned that the Fed’s big move this month is not indicative of the pace of subsequent rate moves in the easing cycle. “Ultimately what we found most important in what Powell said was also among the least surprising things he said: future decisions are going to depend on the data,” Feroli observed. “If labor markets continue to soften, we could see more large cuts ahead. If job growth and the unemployment rate stabilize the path is clear for a gradual move back to neutral.” Meanwhile, economists at Bank of America also see a half-point cut in November. After that, they see a series of quarter-point cuts until the fed funds rate hits 2.75%-3% sometime in 2025, down from 4.75%-5% today. At Citi, economists have taken a dim view of the economy or several months, warning that a recession is likely. They also expect a half-point cut at the next Fed meeting with the outlook tilted toward more large cuts in the future. Powell struggled to explain why the labor market would stabilize around current levels and not continue to deteriorate further when rates will still be at levels the Fed deems restrictive for at least another year,” Citi wrote in a note on Friday. “And given that he described the 50bp cut this week as a ‘commitment’ to not get behind the curve, we think the bar for a continued weakening employment trend to prompt additional large rate cuts is low.”
Over on the other side of the world, Australia’s central bank held its key interest rate at a 12-year high on Tuesday as it struggles to subdue stubborn price pressures that are holding it back from joining a global easing cycle. The Reserve Bank of Australia — as expected — kept its cash rate at 4.35% for a seventh straight meeting and restated it isn’t “ruling anything in or out” on policy. The RBA has sought to hold onto significant post-Covid job gains and as a result inflation is taking longer to come down. The RBA’s decision highlights its outlier status compared with peers. Last week, Federal Reserve Chair Jerome Powell led his colleagues to an outsize rate cut designed to preserve the strength of the US economy. Economists generally expect the RBA’s rate-cutting cycle to begin in February while financial markets see a two-in-three chance of the first easing coming in December. Governor Bullock has repeatedly pushed back against talk of near-term easing, reflecting forecasts that inflation will only return to the 2-3% target in late 2025. That’s brought her into the political firing line from members of the ruling Labor party and minority parties that are pushing for a rate cut.
Yet inflation dived last month to its lowest rate in three years as government cost-of-living relief and cheaper petrol helped household budgets – but the Reserve Bank will wait for a more sustained drop before it starts cutting interest rates. Headline consumer price inflation in August was 2.7%, the slowest increase since August 2021, the Australian Bureau of Statistics said on Wednesday. That compared with the 2.7% rate expected by economists and July’s 3.5% annual pace. The underlying inflation measure, which strips out more volatile price movers, also fell. Known as the trimmed mean, this gauge came in at 3.8%, unchanged from July. While the inflation slide will be welcomed by households, it is unlikely to sway Reserve Bank governor Michele Bullock. She wants to see the more comprehensive September quarter numbers, due out on 30 October, but is doubtful the drop will be enough yet to prompt an interest rate cut.
In another important piece of news, Reserve Bank of Australia governor Michele Bullock is developing a back-up plan to manage “big operational risks” such as cybersecurity and its $1.1 billion building renovation if the Albanese government fails to achieve its proposed shake up of the central bank’s board. A political impasse over the plan to create a recommended specialist monetary policy board and separate governance board has forced the bank to explore setting up a range of subcommittees potentially chaired by existing RBA board members and staffed by RBA officials. Commonwealth Bank chief executive Matt Comyn runs a similar model. The potential “Plan B” model at the RBA would enable specialist advice to be fed up to the nine-person RBA board, to enable Ms Bullock to better share governance responsibilities with other experts. Ms Bullock said on Tuesday the RBA had important responsibilities beyond monetary policy, including being the government’s banker and managing welfare payments, operating the nation’s critical payment system and wholesale cash distribution. “All of these things are really important functions of the bank, and at the moment, I’m the sole accountable authority for those,” she said. “I think that it would be good for us to get some structure, and I think we can, even if we don’t end up with this new dual board structure.” Treasurer Jim Chalmers’ plan to create the two boards is on life support after the Labor government ruled out working with the Greens, who on Monday demanded an interest rate cut in exchange for their support. The decision means the RBA’s six current external board members will continue to set interest rates, despite an independent review last year finding the group collectively lacked the expertise to effectively do so.
For Australians, the Misery index is at its highest level since the global financial crisis and higher than during the COVID-19 era, when we seemed universally fearful for our health and our economic future. Authors of this index, the economic think tank CEDA, describe it succinctly: “Australians are living through the most protracted period of economic misery since 2011.” The Misery Index is influenced by a mix of inflation, or the consumer price index, the unemployment rate and interest rates – with a dollop of GDP thrown in. While the index improved in 2022-23 after the worst of the pandemic had moved through the economy, our misery level has picked up again. In particular, the upwards tick in the past quarter appears to be affected by unemployment creeping up as the economy continues to soften. It highlights the difficulty of the task facing the Reserve Bank governor, Michele Bullock, who is attempting to balance the misery caused by inflation and the misery created by high interest rates. This balancing act is also complicated by the desire to keep the economy growing and the aspiration to retain strong levels of employment. “Unfortunately, Bullock’s only tool to address this challenge – raising interest rates – also inflicts pain. As the index clearly shows, the combined effect of 13 rate rises since May 2022 and inflation is, well, miserable,” says the CEDA research paper on the Misery Index.
The Albanese government has started work on options to scale back negative gearing and capital gains tax concessions, preparing the ground for a bold new housing policy that could define the federal election. The Albanese government has asked Treasury for expert advice on the possible changes after years of dispute over billions of dollars in annual tax benefits as the Greens demand an end to the tax breaks and the Liberals warn against a hit to investors. Prime Minister Anthony Albanese sought to brush off questions about negative gearing last week after Greens leader Adam Bandt spurned a deal on housing policy in the Senate, leading Opposition Leader Peter Dutton to call on the government to “be honest” about its plans. While it is common for governments to ask officials to assess policies without proceeding with the changes, the modelling work showed that Labor was prepared to take an ambitious agenda to the next election.
The Australian Competition and Consumer Commission (ACCC) has launched legal action against Woolworths and Coles. The ACCC alleges the supermarket giants breached consumer law by misleading consumers through discount pricing claims on hundreds of products. The ACCC has alleged both companies sold items at regular prices for up to six months, then increased the prices of those items by at least 15% before being placed in the “Prices Dropped” Woolworths promotion or “Down Down” Coles promotion. The ACCC alleges up to 266 products were involved in pricing claims by Woolworths at different times over an estimated 20 month period and 245 products for Coles over a period of about 15 months. Some of the Woolworths products included Tim Tams, Dolmio sauces, Doritos salsa, Energizer batteries, Kellogg’s cereals and hundreds of others. Coles products included Arnott’s Shapes biscuits, Band-Aids and Cadbury chocolates. “Following many years of marketing campaigns by Woolworths and Coles, Australian consumers have come to understand that the ‘Prices Dropped’ and ‘Down Down’ promotions relate to a sustained reduction in the regular prices of supermarket products,” ACCC chair Gina Cass-Gottlieb said. “However, in the case of these products we allege the new ‘Prices Dropped’ and ‘Down Down’ promotional prices were actually higher than, or the same as, the previous regular price.
Revenue at PwC Australia fell by more than a quarter, or $820 million, to $2.35 billion in the year to June, marking its worst slump on record due to the ongoing fallout of its tax leaks scandal and a subdued consulting market. The firm, once the pre-eminent consulting outfit in the country, has now fallen to third place by revenue behind Deloitte Australia and EY Australia. It remains ahead of KPMG Australia. PwC’s profit fell by 24% in 2023-24, but average partner income only declined by 13% due to top-up payments made to help them with unexpected tax liabilities. The firm also propped up its earnings through a concerted cost-cutting program, which involved hundreds of staff redundancies and dozens of partner cuts. Average partner income at PwC is now about $765,000. This compares to average partner income of $814,000 at EY, $650,000 at KPMG and $510,000 at Deloitte.
Organised crime boss George Alex boasted the CFMEU deemed his firms “untouchable” on building sites because union officials needed their “kickers”, according to police surveillance. The covert police recordings of Alex capture him at his luxury beachside apartment in Surfers Paradise telling disgraced Kiwi businessman and co-conspirator Mark Bryers the CFMEU would not touch his labour hire firms in an industrial scrap with Multiplex. “The CFMEU always do that, but not with me. You do that for everybody [else] but you don’t do it for my blokes – my blokes are untouchable,” Alex says. “They can’t do it with our guys, can’t. F— ’em, they – they need their kicker, they need money, the union, they come to us so they need us to make money.” The police recordings, released by the NSW Supreme Court, offer a further glimpse into the sweeping building industry empire Alex built on Australia’s east coast in the decade after a 2015 royal commission outed him as a criminal figure who had bribed union officials to win CFMEU favours. The recordings from 2019 and 2020 also capture Alex’s criminal lieutenant complaining that a union agreement he secured for a tax-dodging firm did not come cheap. Alex was convicted earlier this month of tax fraud and money laundering, rather than corrupting union officials or building company bosses. But the release by the court of phone tap and listening device recordings appears to back up the Commonwealth DPP’s case that Alex’s criminal operation was able to flourish because of his skill at “leveraging contacts in the trade unions” and big building firms. Alex’s labour hire firms, which supplied workers to big construction projects, were used by him to launder dirty money, including suspected drug dollars, and rort the tax office of millions of dollars. CFMEU administrator Mark Irving, KC – who was appointed to take over the union – has indicated in public statements that he intends to pick up where the AFP investigation into Alex left off: scrutinising the way Alex and other labour hire bosses may have corrupted the union and building companies. But while Irving has compulsory powers for interviews and to produce documents, he has no ability to tap phones, use listening devices or access police information.
The growth in care economy jobs has been 70 times faster than the rise in construction sector roles in the first two years of the Albanese government, with builders warning Labor that they are falling drastically short of the workers needed to meet its housing targets. The number of employees in the construction industry rose by just 2772 to 1.22 million in the two years to June, according to analysis of Bureau of Statistics data. With the size of Australia’s workforce rising by more than 850,000 people over the same period, the growth in the construction industry has been outstripped by a host of other sectors, including roles in social assistance and healthcare or “care economy” sector, which has swelled by more than 336,000 to 2.37 million. Construction lobby group Master Builders Australia (MBA) said the industry’s workforce needed to increase by 130,000 by 2029 if Labor were to have any chance of delivering on its promise to build 1.2 million “well-located” homes in five years alongside additional supporting infrastructure. While the group’s chief executive Denita Wawn said there would be “no quick fix” to the continued workforce shortage facing the building and construction sector, she advocated for a whole-of-government approach across migration, skills and industrial relations portfolios. “Despite challenges, the industry is in a unique position to grow and innovate,” Ms Wawn said. “There is a strong pipeline of work for the industry across the housing, commercial and civil sectors, presenting a great opportunity for people to join.” Included among the MBA’s recommendations to government is the establishment of a specialist “construction skills pathway visa” akin to similar programs in Canada, New Zealand and Britain, providing applicants with options for permanent residency. Apprenticeships in the building and construction industry should be incentivised via commencement and completion bonuses to apprentices and their employers, the MBA has recommended, alongside a wage subsidy throughout the duration of the apprenticeship. Labor is undertaking a strategic review into Australia’s apprenticeship incentive system. The MBA also advocated for state, territory and commonwealth governments to harmonise occupational licensing requirements and streamline recognition of internationally comparable qualifications. That increase of 130,000 new additional workers would need to come on top of the significant number of people permanently exiting the industry each year, which the MBA estimated was more than 100,000 due to retirement of Baby Boomer tradies.
Australia’s REA Group has made a second takeover proposal for Britain’s largest property listings company Rightmove, valuing the business at close to £5.9bn. REA’s bid marks a roughly 7% increase from its previous offer which Rightmove had rejected. Last week Rightmove said it had rejected the initial cash-and-shares bid from REA as being “wholly opportunistic”, and that it fundamentally undervalued Rightmove and its future prospects. REA, which is controlled by Rupert Murdoch’s News Corp, said its initial proposal valued Rightmove’s shares at a 27% premium to the UK company’s share price before the Australian company’s interest was made public. As part of the initial offer, REA said Rightmove shareholders would own 18.6% of the combined company based on its indicative offer. It intended to seek a secondary listing on the London Stock Exchange to allow UK investors to trade the shares, it said. Rightmove has an 80% market share in online property listings but has warned of slowing customer growth. Rival OnTheMarket was acquired last year by US real estate data group CoStar and has since launched an expansion push. Under UK takeover rules, REA has until the end of September to make a formal offer or walk away.
And that’s it for this week. And next week, I’ll be talking to Melrose Health Group’s CEO, Nathan Cheong. Nathan is a leading figure in Australia’s complementary medicine sector and has just completed a revolutionary new direction for Melrose with the launch of FutureLab, creating Australia’s first over the counter range of longevity supplements.
And I’ll be talking to AMP Capital chief economist Shane Oliver about the last profit reporting season and what it says about the economy.
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Wishing you all a safe and healthy week, And looking forward to bringing you Talking Business next week.
