This is episode number thirty-nine in our series for 2020 and today’s date is Friday, October 30.
First I talk to Lachlan Donald, CEO of Australian tech company BuildKite. COVID-19 has forced businesses to build new software overnight – Buildkite gives developers the tools they need to keep up with the demand for software built with speed, scalability, and security.
And then I’ll be talking to AMP chief economist Shane Oliver about how the market has been doing during the recession and how long it will take to recover.
But now, let’s talk to Lachlan Donald.
The coronavirus is hitting markets.
The ASX dropped 1.7% after US stocks on Monday notched their biggest one-day drop in a month on fears that rising coronavirus infections will dampen business activity and as another session passed without a deal for pre-election fiscal stimulus.
The S&P 500 fell as much as 2.9% in afternoon trading, as the latest infection data undercut hopes of the virus is contained. However, the benchmark index trimmed its losses to end 1.9% lower — its biggest one-day loss since September 23 — as Nancy Pelosi, Democratic speaker of the House of Representatives, expressed optimism on a stimulus deal. The sell-off was broad, with economically sensitive sectors such as energy, financials, and industrial groups under pressure. Travel and leisure companies sustained heavy selling. It followed a gloomy day in Europe, in which Frankfurt’s benchmark Dax index slumped 3.7%. Germany’s SAP tumbled as much as 22%— its worst one-day fall since the mid-1990s.
The Australian economy has emerged from its first recession in 30 years, the Reserve Bank believes but is warning the recovery will be marred by growing business failures and cash-strapped households struggling to pay off their mortgages. Deputy Governor Guy Debelle on Tuesday told a Senate estimates hearing that it appeared the Australian economy grew through the September quarter. The economy contracted through the first six months of the year with the June quarter posting the largest three-month slowdown since the end of World War Two.
It was the first time since 1990-91 that the economy had contracted for two consecutive quarters. But Dr. Debelle said the economy probably expanded over the previous three months even taking into account the shutdown of Victoria through all of the period. Dr. Debelle said while some parts of the country were doing well, such as the West Australian mining sector, others including tourism, education, and services such as entertainment were struggling.
Extra monetary policy support will be necessary, with RBA assistant governor Michele Bullock using a speech to say any recovery will be rocky. Ms. Bullock said while the nation’s banks were in a strong position, there were clear economic challenges. These included expectations that business failures would increase even as the economy started to improve, as many firms were being kept afloat by government support programs, temporary insolvency relief, or loan repayment deferrals.
Moody’s Investors’ Services said mortgage delinquencies will continue to increase over the next year. Australian mortgage delinquency rates have increased because of the economic fallout from the coronavirus, rising to the highest since 2005 in Victoria and the highest since 2013 in New South Wales (NSW) by May.
Mortgage delinquency rates will continue to increase over the next year, given the ongoing economic fallout from the coronavirus. Economic conditions will remain uncertain, driving delinquencies higher. The economic recovery will be tenuous over the next year, with labour and housing markets remaining soft and government and lender support measures ending.
These factors will drive mortgage delinquency rates higher. Over the next year, mortgage delinquency risks will be high in regions with large economic and labour market dependence on industries such as tourism, hospitality, and retail, which have been hit hard by coronavirus disruptions.
Victoria’s COVID-19 lockdown has seen the state sink to the third position compared to other Australian jurisdictions on key economic performance indicators, its lowest level in over three years. But it remains above the other big economic states of NSW and Queensland, the latest quarterly Commonwealth Securities state of state report shows. A key factor driving the relative success in economic performance has been the relative success in suppressing the virus.
Every quarter CommSec measures the performance of the states through eight key indicators – economic growth, retail spending, equipment investment, unemployment, construction work, population growth, housing finance, and dwelling commencements. For the first time, Tasmania has topped the rankings for the third consecutive quarter, buoyed by new home building and demand for mortgages.
The ACT rose to the second position, its highest ranking in just over three years based on its relative economic growth performance, falling unemployment, and investment by business. Victoria lost ground on falling retail spending and demand for home loans.
Retailers reopened their doors to Melbourne shoppers from midnight on Tuesday after more than two months of shut down. Shoppers are expected to flood stores following months of online shopping and click and collect only.
However, there will still be limits on the number of people allowed in stores and venues at one time. Face masks remain mandatory and people must maintain 1.5 metres from others. That includes more than 2200 TAB retail workers who are set to return to their counters in Victoria, just in time to take bets on the Melbourne Cup after Premier Daniel Andrews began easing restrictions on Melbourne’s three-month lockdown.
The re-opening is generating momentum for the removal of state border blockades, including between NSW and Victoria, and the blanket closure still being imposed by the West Australian government. The 112-day shutdown in Victoria caused by the second wave of coronavirus prompted other state leaders to either reimpose border closures or maintain existing ones, rather than open up by July as initially agreed by the national cabinet in May.
This exacerbated the economic malaise. At the national cabinet on Friday last week, all states and territories except WA agreed to a three-step plan to reopen their borders by Christmas. Victoria’s three drive-ins will be permitted to operate from Thursday, and from November 2 the Tamir family’s three rooftop cinemas — at the Classic in Elsternwick, Lido in Hawthorn, and Cameo in Belgrave— will also resume operations, with a cap of 50 patrons. But indoor cinemas, both in Melbourne and regional Victoria, have been given no target date for re-opening, a situation that Village Entertainment chief operating officer Gino Munari said was “beyond frustrating”.
Westpac has taken a A$1.2 billion ($871 million) charge against second-half earnings to cover a record money-laundering fine and the mounting cost of compensating customers for years of misconduct. The charge is the latest blow to Australia’s oldest bank, which last month was hit with a A$1.3 billion penalty for the country’s biggest breach of anti-money laundering laws. Earlier this year it deferred paying a dividend as bad-debt charges swelled amid the coronavirus-induced recession.
Two days out from its full-year profit result, ANZ has warned its second half 2020 cash profit will be hit by an after-tax charge of $528m as a result of large items, including remediation costs and accelerated software amortisation. The charge impacts statutory profit by a similar amount.
Bendigo and Adelaide Bank has revealed a $2.5 billion fall in the value of frozen loans in a trading update while revealing borrowers from Melbourne account for around one-quarter of all of its deferred loans. According to the bank’s data Victoria accounted for 50% of residential and consumer support packages while business and agribusiness customers accounted for 55% of support packages offered.
There are a total of 1500 Melburnians relying on the bank’s offer to freeze loan repayments for residential and consumer loans out of a total of 5,190 customers across the nation while there are 943 business customers from Melbourne not making payments out of 3,556 spread across the nation. The bank provided the detail in an unexpected first-quarter trading update timed to coincide with its annual general meeting. In aggregate, the bank said the number of frozen loans was down 69% from the peak recorded at the end of May. The number of frozen loans at the regional bank is down 74% for retail customers and 49 for business customers.
The corporate regulator’s chief enforcer Daniel Crennan, QC, has resigned following revelations the government agency incorrectly paid about $70,000 in rent for his Sydney home. ASIC paid $69,621 in housing costs on behalf of Mr. Crennan equal to $750 weekly rent in 2018 and 2019 after he was asked to relocate from his long-time home of Melbourne to ASIC’s Sydney office. In a statement on Monday, Mr. Crennan said he had tendered his resignation to Treasurer Josh Frydenberg with immediate effect.
This came after the chairman James Shipton stepped aside for an independent investigation into the payments of more than $180,000 that ASIC made to cover the cost of managing his international tax affairs. The Auditor-General raised serious concerns about both. Shipton is unlikely to survive as chairman because the corporate conduct regulator must be seen to be beyond reproach and due to the political hostility towards the remuneration of executives at government-owned Australia Post. Treasurer Josh Frydenberg will strongly consider a broader overhaul of ASIC’s leadership model, once he receives an independent review by December into its remuneration and procurement practices.
And in extraordinary testimony to a Senate committee that exposed senior divisions at the Australian Securities and Investments Commission, ASIC’s acting chairwoman Karen Chester threw Mr. Shipton under a bus and distanced herself and other senior commissioners from Mr. Shipton, who has stepped aside for an investigation, and deputy chairman Daniel Crennan, who resigned on Monday.
She said the full leadership commission at ASIC was not aware of Mr. Shipton’s $118,557 KPMG tax services bill that was paid for by ASIC in 2018, until after the Australian National Audit Office expressed concern in September this year. Ms. Chester and fellow commissioners Danielle Press, Sean Hughes, and Cathie Armour were “not fully aware” of the matters at the time, she said, adding that they found out in mid-September 2020 about the auditor’s concerns about the allowances for housing and tax services. Ms. Chester suggested that most of the commission was kept in the dark about the auditor taking issue in August 2019 about $750-a-week housing payments for Mr. Crennan after he relocated from Melbourne to Sydney for work.
Coles’ same-store supermarket sales rose 9.7% in the September quarter, boosted by a popular Little House collectibles promotion and strong demand for food and groceries both online and in-store by locked-down Victorian shoppers. The 9.7% same-store sales growth compared with 7.1% growth in the June quarter and beat most analysts’ forecasts. The September quarter sales were buoyed by stronger than expected e-commerce growth and heightened demand in Melbourne, where cafes, restaurants, and food courts were closed and supermarket shopping was one of only a handful of permitted activities. Excluding Victoria, same-store food sales rose 7.7%.
A lobby group representing hundreds of Australia Post licensees plans to each send the Prime Minister $5 in support of Australia Post chief executive Christine Holgate. The money is intended to cover the cost of almost $20,000 worth of luxury watches gifted to senior executives. The licensees praised Ms. Holgate’s changes to the organisation claiming they saved their businesses.
The Licensed Post Office (LPO) Group said hundreds of post office licensees had expressed their support for Ms. Holgate, insisting they would be out of business if not for the changes she had made to the organisation. In 2018 Australia Post secured a lucrative commitment from Commonwealth Bank, Westpac, and NAB to contribute $100 million a year to fund banking services in post office branches.
These branches operate in towns where there are no banks, and they have been doing it at a loss. The deal is at the heart of the Cartier watch controversy, but the lobby group hailed it as a much-needed lifeline for post offices struggling to turn a profit.
The federal government’s JobMaker hiring credit is not suited to many SMEs that are still in a recovery phase, according to professional accountancy body CPA Australia, as new estimates suggest the program will not create as many new jobs as initially promised.
On Monday, Treasury officials revealed the hiring credit is expected to create only 10% of the new jobs promised by Treasurer Josh Frydenberg when he unveiled the $4 billion policy on budget night. At the time, Frydenberg said the wage incentive, which is targeted at younger workers, would support “around 450,000 jobs for young people”. However, Jenny Wilkinson, deputy secretary of Treasury’s fiscal group, told Senate estimates on Monday that Treasury believes the number of “genuinely additional” jobs created by the program will be closer to 45,000.
The UK-based Coco-Cola European Partners Plc agreed to buy Australian bottler Coca Cola Amatil, creating a global producer of many of the world’s most popular packaged drinks. The deal values Sydney-based Coca-Cola Amatil at A$9.23 billion ($US6.6 billion), a 19% premium to where its shares traded last week.
The target’s board intends to unanimously recommend the offer, according to a statement Monday. The A$12.75-per-share cash offer would give Coca-Cola European Partners an even larger international footprint and immediate scale in the Southern hemisphere and allow it to expand into Asia. It would be the largest deal involving an Australian company so far this year, according to data compiled by Bloomberg.
The deal underscores how soft drink bottlers are under pressure to consolidate amid slowing sales, partly from the coronavirus pandemic, but also a broader shift by health-conscious consumers away from sugary drinks. Beyond fizzy staples like Coca-Cola, Fanta, and Sprite, the Australian company has diversified into whiskey, rum, and tequila, as well as beer and ground coffee.
Iconic retail chain Riot Art & Craft has collapsed reportedly owing more than 100 staff millions of dollars in entitlements. Liquidator Nicholas Giasoumi, of Dye & Co, said the chain’s 57 stores around the country, including 11 in Queensland, had been shut permanently with 140 staff terminated. Employees were estimated to be owed about $3.5 million in wages and entitlements, Mr. Giasoumi said. Mr. Giasoumi said COVID-19 would have had an impact on the chain’s financial position but it was too early to say if that was the only reason for the collapse. He could not confirm how much was owed to creditors.
COVID-19 has changed shopping.
According to the latest survey by LivePerson, the world’s first AI conversational cloud, a survey of 63% of Aussies found they missed retail shopping a lot or a little during COVID-19 and 86% feel that physical storefronts are still important when making retail purchases, but only 48% believe that we’ll be ‘shopping as normal’ by this time next year.
In the meantime, 72% say concerns about the virus make them worried about shopping instore and 82% now rate ‘contactless shopping’ as important. When asked specifically about their online customer service experiences and why they abandoned purchases at checkout, the results are sobering for retailers:
- 42% have been unhappy with delivery details or options
- 34% want to do more research before making a purchase
- 30% have been unhappy with the price
- 20% have not been able to find everything they need
Homewares group Adairs has reported a 22% bump in sales over the past four months despite store closures in Victoria as people keep spending money online buying furniture, bedsheets, and towels. The growth was entirely driven by online shoppers, with online sales soaring 134%, while store sales dropped 0.6%.
And that’s it for this week. And next week, I’ll be talking to Rob Wilson, CEO of Incent. a loyalty reward company using blockchain to provide a different consumer-centric reward offering. Consumers are rewarded for their entire expenditure including bills, rent, shopping, and utilities which can be redeemed to cryptocurrency or cash. And I’ll be talking to CommSec chief economist Craig James about what’s ahead in the market for the week.
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 safe and healthy week and looking forward to bringing you Talking Business next week.