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 five in our series for 2020 and today’s date is Friday March 6.
First I talk to lawyer Rob Bryden who will provide commentary on what franchisees should do if they find themselves in a dispute against a franchisor.
And then I’ll be talking to Rabobank economist Michael Every about the impact of the coronavirus on the global economy.
But first, let’s talk to Rob Bryden
Factory activity in China fell at a record rate in February, as manufacturers closed their operations to contain the spread of coronavirus. The country’s official measure of manufacturing activity – the Purchasing Manager’s Index (PMI) – dropped to 35.7 from 50 in January. It shows the virus is having a bigger impact than the financial crisis that shook the world last decade. Chinese manufacturing has fallen even more than it did in the global financial crisis.
The data also suggests that factories are struggling to find enough workers. PMI figures – calculated with data from monthly surveys of private sector companies – are a key indicator of a county’s economic health, and can move financial markets. China makes up a third of world manufacturing and is the world’s largest exporter, so this PMI drop – well below analysts’ expectations – will have a knock-on effect on other countries.
Restrictions in place in the so-called “factory of the world” have also affected companies such as Apple, Diageo, Jaguar Land Rover, and Volkswagen, which rely on China’s production and consumer market. The big question now is how quickly factories can return to normal. Many are dependent on China’s 300 million migrant workers, a third of whom are still not working because of quarantine rules. According to Bloomberg Economics, Chinese factories were operating at 60% to 70% of capacity this week. It is expected that China’s economic growth will take a significant hit in the first half of this year because of the impact coronavirus has had on business and spending in the country.
The World Bank and the IMF have set aside “emergency funding” for countries to fight the fast-spreading coronavirus as the OECD warned that the outbreak could more than halve global economic growth this year. The bleak forecast from the group of wealthy nations, which would constitute a global recession, has led to promises of action from central banks and other international institutions seeking to limit the economic damage. In a joint statement, the heads of the IMF and World Bank said they had prepared their emergency lending facilities so that no country or health system should be short of funds to fight the disease on their soil. At the same time, Fed chair Jerome Powell said during a press conference that the U.S. economy remains strong but the virus outbreak will weigh on activity “for some time.”
The Australian economy could be plunged into recession if the coronavirus outbreak goes global, with as much as 8% carved from growth over a year, according to new modeling by the economic expert Warwick McKibbin. McKibbin, whose previous work on the economic impact of the disease includes examining the impact of the 2002 Sars pandemic, has modeled the effects of a range of Covid-19 infection scenarios on growth in Australia and around the world.
He said if the disease went global it could carve as little as 2% from Australian growth, but this would still be enough to send the economy into recession, given that GDP increased by just 1.7% in 2019. In the worst-case scenario, where the disease spreads aggressively and kills 3% of patients, Australias GDP would plunge 7.9% in the first year before quickly bouncing back. McKibbin, a professor at the Australian National University and a former board member of the Reserve Bank, cautioned that his results were very sensitive to the assumptions used, including government responses.
The US Federal Reserve jumped into the Reserve Bank’s slipstream, slashing its benchmark interest rate in an emergency move to bolster the economy amid the coronavirus outbreak. The Fed’s Open Market Committee lowered the range for the world’s most important policy rate by half of a percentage point to between 1% and 1.25%.
Hours before, the Reserve Bank of Australia slashed interest rates to a record low of just 0.5% as it seeks to contain the economic fallout from the escalating coronavirus crisis. It foreshadowed it would cut again if necessary.
Australia’s GDP numbers have the economy growing 0.5% in seasonally adjusted chain volume terms in the December quarter 2019 and a weak 2.2% through the year
ANZ Australian Job Ads gained 0.7% m/m in February but is still down 10.2% y/y. In trend terms, it declined 0.4% m/m and 12.1% y/y.
Australia’s current account was again in surplus in Q4 but fell to $1 billion from the revised $6.5 billion in Q3. The decline in the surplus reflects the trade balance falling (from $19.9bn to $13.9bn).
Building approvals have fallen to the lowest monthly total in more than six years as consents for units and townhouses in Victoria plummeted. A 15.3% seasonally adjusted monthly fall in dwelling approvals in January meant 1,700 fewer homes were given the go-ahead compared to December. The 13,016 approvals were the lowest monthly total since 2013,
Consumer confidence fell 3.2% last week, driven by weakness in ‘economic conditions’. The index is now at a five-and-a-half-year low. Current economic conditions’ saw a significant decline of 16.6%. In percentage terms, the downturn was the largest since January 2009. ‘Future economic conditions’ declined by 2.9%. Both the subcomponents are well below long-term averages.
Australia’s housing boom is back in full swing with prices in Melbourne reaching a record high, and Sydney not far behind. Property values in the eight state and territory capitals surged 1.2% last month, according to CoreLogic Inc. data released Monday. The upswing in prices, which started mid-2019, has already recouped most of the losses of a near two-year swoon as record-low interest rates and looser borrowing standards sent buyers flocking back to the market.
In Melbourne, Australia’s second-most populous city, home prices jumped 1.2% last month to surpass the previous peak reached in September 2017. Home values in Adelaide, Brisbane, Canberra, and Hobart also hit new highs. Sydney posted the biggest monthly gain, with home values climbing 1.7%. At current rates of growth, prices are on track to recoup all of their 15% peak-to-trough declines and reach a new record by the end of May, CoreLogic said.
Australian Prime Minister Scott Morrison has hinted strongly that investment tax breaks for business will form part of the coronavirus stimulus package, citing the need to lift business spending as one of three priorities for boosting the economy once the crisis has passed. In a package that will be bigger than envisaged last week when Mr. Morrison first flagged economic assistance, the Prime Minister said the focus of the measures would be “jobs, cash flow, and investment”.
Two-thirds of Australian SMEs have been directly or indirectly impacted by the recent bushfires, with business disruption, higher insurance, and other costs and lower customer confidence cited as key factors keeping business owners awake at night. More than 70% of small businesses say the fires will continue impacting their business over the next three months, according to a new report released today by NAB. Owners of utility and wholesale trade businesses expect to be most affected over the next three months, at 81% and 79% respectively. Approximately 75% of both the transport and storage sector and agricultural businesses say they expect to be feeling the effects of the bushfires for at least 12 months.
And the fires have affected the numbers in this profit season. Company profits posted a weak headline result down 3.5% for the quarter following a decline of 0.6% in Q2.
The coronavirus has also affected Australia’s manufacturing sector. The Australian Industry Group Australian Performance of Manufacturing Index (fell a further 1.1 points to 44.3 in February – its lowest result in almost five years, and the first time the index has recorded four consecutive months of contraction since 2014 (readings below 50 points indicate contraction inactivity, with the distance from 50 indicating the strength of the contraction). While the majority of remain concerned about drought, weak demand from the construction sector and a general slowdown in the economy, coronavirus emerged as a concern for respondents for the first time in February, impacting negatively on the exports of Australian manufactured goods.
Small businesses affected by the coronavirus will be able to defer tax debts in the same way as firms hit by the summer bushfires, under a government plan to formalise eight-week deferrals for the business activity statements of companies squeezed for cash. Scott Morrison has also asked for access to small business loans and grants to be “rephrased and reviewed” to improve the delivery of financial help to small firms suffering as a result of the bushfires.
Australian Prime Minister Scott Morrison has personally spoken with the bosses of Coles and Woolworths seeking assurances their supermarkets will not run low on essential supplies as panic buying begins to break out across the country. Australian supermarket shelves are being stripped of supplies due to coronavirus concerns. Toilet paper, hand sanitiser and face masks are among the items most in demand. Woolworths has applied a four-pack limit to purchases of toilet paper as panic buying sparked by the growing coronavirus crisis empties supermarket shelves across Australia of household staples.
Mr. Morrison said he had also asked the ACCC to relax restrictions so Coles and Woolworths, if necessary, could join forces to guarantee essential supplies. The Prime Minister urged people not to panic, saying supplies were guaranteed. He said everybody should exercise common sense and rely on official information sources, not internet rumours and speculation.
The world’s second-biggest reinsurer, Swiss Re, says climate change is already resulting in a “new world” of weather uncertainty that will push up the cost of insurance in Australia. The Swiss firm, which underwrites risk for Australia’s major general insurers, last month reported that catastrophic events in Australia last year had contributed to a total catastrophe loss of $US2.3 billion ($3.5 billion). Mark Senkevics, managing director of Swiss Re’s Australian and New Zealand operations, said the reinsurer was concerned by an apparent upward trend in “secondary perils” – events such as bushfires, hailstorms, and extremely heavy rain. Primary perils are earthquakes and cyclones.
After 85 years of operation, national news agency Australian Associated Press (AAP) will close its doors, with about 500 job losses at the newswire service. AAP is owned by Nine, News Corp Australia, The West Australian, and Australian Community Media. Media companies all around the world have faced disruption amid falling revenues AAP provides a range of services to media companies including newswires, subediting and photography. Chief executive Bruce Davidson on Tuesday said the business was no longer viable in the face of increasing free online content. The service will close on June 26.
Harris Scarfe appears set to change hands for the sixth time in less than 20 years after homewares retailer Spotlight Group clinched a deal which could see most of the department store chain’s remaining 44 stores continue to trade.
Spotlight, owned by AFR Rich Listers Morry Fraid and his nephew Zac Fried, has been granted exclusive rights to negotiate an acquisition by Harris Scarfe’s receivers, Deloitte Restructuring Services Partners Vaughan Strawbridge, Kathryn Evans, and Tim Norman. They hope to finalise a sale by mid-April, conditional on landlord consents. Harris Scarfe went into voluntary administration and receivership in December, two weeks after being sold by Greenlit Brands to private equity firm Allegro Funds.
If the sale goes ahead it will save the jobs of as many as 1300 Harris Scarfe staff and enable hundreds of suppliers – including PAS Group’s DesignWorks, Hanes Brands, Linen House, Sunbeam, Remington and Givoni – and landlords such as Stockland, Scentre Group and Vicinity to continue to trade with the retailer.
Years of drought have wiped nearly $13,000 off-farm incomes and the coronavirus outbreak poses a “significant short-term risk” to valuable Asian export demand, according to national commodity forecaster ABARES. It shows farm incomes fell on average by 8% for the year, with some incomes “close to zero this year” The drought and coronavirus take the majority of the blame, with bushfires affecting certain regions In its latest outlook, ABARES found billions of dollars had been stripped from the farm sector in recent years, falling from a record high of $63.8 billion in 2016–17 to a forecast $59 billion in 2019–20. The total volume of farm production has also tumbled, down 18% from the 2016–17 record. It shows farm incomes fell by 8% between 2018–19 and 2019–20 to an average of $150,000 per farm. That is 4% below the 10-year average of $158,000 per farm.
Australia’s smallest state seeks to benefit from its abundance of hydropower generation and the falling cost of large-scale production from renewables to make emissions-free hydrogen for export to Asia. Hydrogen projects are being mooted around Australia, with a 2018 government report estimating that the industry could be worth more than $1 billion to the economy annually by 2030. The Tasmania state government’s Hydrogen Action Plan includes a 1,000-megawatt renewable hydrogen plant, as well as funding for concessional loans to promote further investment. Tasmania’s reliance on hydroelectricity, which makes up the bulk of generation on the island, meant it could produce renewable hydrogen as much as 15% cheaper than other parts of Australia, according to the report published on Monday.
The Federal Court has ordered pharmaceutical giant Johnson & Johnson to pay almost $2.6 million in damages to three women implanted with faulty pelvic mesh implants. A class action involving more than 1,350 women successfully sued Johnson & Johnson last year Hundreds of women have suffered serious and debilitating side effects from the company’s pelvic mesh implant, The court is yet to make full orders in the case. The mesh devices have left hundreds of Australian women with serious side effects including chronic pain, infections, and the inability to have sex. The court found Johnson & Johnson were “negligent”, driven by commercial interests, and failed to give appropriate or sufficient remedial action once it knew of problems with the implants.
And the profit reporting season is winding up.
Harvey Norman blames bushfires and extreme weather for a subdued Christmas period as the retailer’s first-half profit slipped by 4%. Harvey Norman reported a net profit of $213.59 million for the six months to December 31, with its overseas ventures outperforming local operations.
Bega reported a 17.3% surge in first-half export revenue to $230 million, on the back of the first full December half impact from Koroit, strong demand and better prices.
Total revenue climbed 14% to $741.2 million.
Earnings at Costa Group landlord Vitalharvest Freehold Trust crashed 29% in the six months to December as it endured an almost biblical period of drought, bushfires, hail and pestilence. The trust, which owns $276 million of citrus and berry farms leased to the ASX-listed fruit and vegetable producer reported funds from operations (FFO) of $6.7 million for the half-year, compared with $9.5 million for the corresponding half the year before.
And that’s it for this week. And next week. I’ll be talking to Tiffani Bova, Global Customer Growth and Innovation Evangelist at Salesforce. And I’ll be talking to economist Nicholas Gruen about creating citizens’ assemblies.
In the meantime, you can find me on Twitter at talkingbizz, on Facebook, and on LinkedIn. And if you want, leave a comment. Wishing you all a terrific week, and looking forward to bringing you Talking Business next week.