By cutting oil output so much with Brent close to $100, OPEC+ is gambling with the global economy.
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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 10 in our series for 2023 and today’s date is Friday April 7.
Today, I’ll be talking Telstra’s Cyber Security Expert Darren Pauli on how Australians can protect themselves from cybercrime. And I’ll be talking to CommSec economist Craig James about what to expect in the market next week.
But now let’s talk to Darren Pauli.
So what’s happening in the news?
OPEC+ announced a surprise oil production cut of more than 1 million barrels a day, abandoning previous assurances that it would hold supply steady and posing a new risk for the global economy at a time of added fragility after massive interest rate hikes. It’s a significant reduction for a market where — despite the recent price fluctuations — supply was looking tight for the latter part of the year. If the attempt to lift prices were successful and sustained, it would be a blow to those economies still battling to bring still-unsustainable inflation rates under control. Indeed, if prices were to continue to rise and remain elevated, it would threaten a global economy already flirting with recession by forcing central banks to maintain interest rates higher for longer to bring their inflation rates down to sustainable levels. After Saudi Arabia’s announcement of a unilateral cut of 500,000 barrels a day from May until the end of 2023, Russia said it would extend a voluntary cut of 500,000 barrels a day until year’s end. The United Arab Emirates, Kuwait, Iraq, Oman and Algeria said they would also cut output over the same time period, by a total of 581,000 barrels a day. With the additional cuts pledged by Russia and some other countries, the new round of oil production cuts, on a “voluntary” basis, could exceed 1.65 million barrels a day, on top of production cuts of 2 million barrels a day announced in October. Oil futures soared as much as 8% in New York on Monday while gasoline also gained, adding to inflationary pressures that may force central banks around the world to keep interest rates higher for longer. Saudi Arabia led the cartel by pledging its own 500,000 barrel-a-day supply reduction. Fellow members including Kuwait, the United Arab Emirates and Algeria followed suit, while Russia said the production cut it was implementing from March to June would continue until the end of the 2023. The international Brent benchmark traded near $84 a barrel in Singapore, while US gasoline jumped as much as 4.5%. Any increase in the cost of transportation fuels tends to be closely monitored by American politicians, particularly ahead of the summer season when more people take road trips and vacations. Top oil issued calls for $100 crude after the decision, with some expecting worldwide supply-demand balances to be in deficit earlier than expected. That view was reflected in the strengthening of Brent’s backwardation — where the premium of prompt shipments rises relative to later supplies in a closely watched signal of tightness. The surprise move could once again flare tensions between the US and Saudi Arabia, a regional partner whose relationship with President Joe Biden’s administration has been tense. The White House said that the new cuts were ill-advised. The move on Sunday — announced a day before the OPEC+ monitoring committee is due to meet — was an unprecedented way to decide policy for the group, which has had to adapt in recent years first to the demand shock of the pandemic and now to the war in Ukraine and the fallout of sanctions.
Data acquired by Finbold indicates that in Q1 2023, the global tech industry recorded 166,004 layoffs. January accounted for the highest share of the total layoffs representing 53% or 89,514 workers. The laid-off workers for the first three months of 2023 have surpassed the 164,411 employees that were let go during the entire of 2022. A breakdown of the companies indicates that the top five tech companies have cumulatively laid off 57,000 employees in Q1 2023. E-commerce giant Amazon leads at 17,000, followed by Google’s parent company, Alphabet at 12,000. Meta and Microsoft have each let go of 10,000 workers, while Salesforce ranks fifth at 8000.
The Reserve Bank has given mortgage borrowers a reprieve, at least temporarily, by leaving interest rates on hold at its board meeting. After 10 consecutive rate rises, the RBA opted to wait and see how the economic data plays out, amid early signs that the increase in rates so far is starting to weigh on consumer spending and lower inflation. The RBA has held interest rates steady after 10 consecutive rate rises. The cash rate target remains at 3.6%. . RBA governor Philip Lowe said further rate rises “may well be needed” to tame inflation While the hiking cycle may appear over, a shift in financial sentiment or an unexpected surge in consumer prices could leave the RBA with little choice but to hike rates further. The RBA’s decision reflects the data and information available to them at the time and that can easily change, particularly in an uncertain economic or financial environment.
Medicare is haemorrhaging up to $3 billion a year in waste, according to a government-commissioned review of the health system’s integrity, which warns it risks losing billions more to rorts in an overly complex and opaque bureaucracy that needs urgent reform. An independent report into non-compliance and fraud in the $38 billion universal healthcare system by health economist Dr Pradeep Philip has found Medicare is so poorly structured and loosely scrutinised that it is no longer fit for purpose and has left “the gate wide open” to fraud. The former head of the Victorian Health Department says the 6000 items on the Medicare Benefits Schedule are difficult to navigate, only a small portion of 500 million transactions each year are scrutinised, and the growing corporate ownership of medical clinics has weakened the relationship between doctors and patients while limiting oversight of billing. Philip flags several areas requiring urgent attention, including a continuous monitoring system that would send SMS alerts when claims are made, and simplifying the Medicare billing system with items that better cater for complex conditions, clearer language and more details of the service, such as length and location. Other recommendations include the establishment of a new Medicare oversight committee made up of department representatives and independent experts, while the powerful Australian Medical Association would lose its veto power over who runs the system’s regulator.
The value of Australia’s coal and gas exports could be halved in just five years as new forecasts warn booming commodity prices have likely passed their peaks and key trading partners across Asia are increasing efforts to curb greenhouse gas emissions. Federal government trade data, to be released on Monday, reveals earnings from Australia’s minerals and energy exports are set to reach unseen highs of $464 billion in 2022-23 after Russia’s invasion of Ukraine worsened a global energy crisis and boosted fuel prices for a second straight year. Record income from sales of Australian thermal coal – the type of coal burned in power stations – and metallurgical coal used in steel-making furnaces are expected to be $128 billion for the financial year, overtaking iron ore as the country’s most lucrative export. Australia’s exports of liquefied natural gas, meanwhile, are forecast to hit $91 billion in 2022–23, three times higher than in 2020–21, on the back of record-high prices as northern hemisphere nations scrambled to secure alternative supplies to Russian gas. However, the figures from the Department of Industry, Science and Resources warn that the spectacular surge in energy commodity prices from 2022 has now “largely unwound” as the world economy slows and supply chain disruptions due to COVID-19 and weather show signs of easing. The value of Australia’s overall coal exports is predicted to fall by $79 billion, from $128 billion to $49 billion, by 2028. LNG is expected to retreat by $44 billion, from $91 billion to $47 billion. This means Australia’s total fossil fuel export earnings could fall by more than $123 billion.
ASX-listed automotive classifieds business Carsales has bought a local advertising technology company, as it continues its push to nab a bigger slice of the advertising market from traditional media outlets. Documents filed to the Australian Securities and Investment Commission (ASIC) show the $8.8 billion classifieds business has bought Publift, an Australian company founded by two former Google advertising executives, which helps online publishers generate ad dollars more effectively by using automated advertising technology.
Local start-up investment cratered in the first quarter of 2023, according to the report from Cut Through Venture which was published on Tuesday, showing a dire financial picture for the nation’s tech start-ups. There was $661m in funding reported across 82 deals – a dramatic drop compared with $3.3bn for the same period a year earlier. The results of the survey of about 140 investors, including start-up accelerator programs, angel syndicates, family offices and venture capital funds, suggests that valuations in later-stage private start-ups have fallen by up to 50%, which in some cases would mean billions of dollars wiped from market capitalisations. More lay-offs are likely as more than half of those surveyed reported that some of their portfolio companies have either already laid off staff during the quarter or were planning to. Australian start-ups have collectively laid off thousands of staff in the past 12 months – with Mr Yum, Zoomo, Immutable, Milkrun and Till Payments each cutting their workforce by double-digit percentages. Statistics show more workers in tech were laid off in the past year than in 2020 and 2021 combined despite relatively low unemployment rates, and unprofitable start-ups were forced to cut costs after hiring too quickly during the pandemic. The vast majority of investors – 119 out of 140 – said they expected start-up valuations would fall during the remainder of the year.
Australia’s premier ship builder and defence contractor, Austal, could find itself frozen out of future lucrative US Navy contracts just at a time when Western nations are rebuilding their fleets, after the powerful SEC charged three former Austal US executives for allegedly making false and misleading financial statements. The allegations of fraud against the Austal executives come as Australia, the US and Britain undertake their historic AUKUS submarine partnership – making it a sensitive diplomatic and operational time for the US securities regulator to launch its court actions against the Australian shipbuilder. The SEC has alleged the former US-based executives of Austal – which is 19% owned by Australian multi-billionaire Andrew Forrest – orchestrated a fraudulent revenue recognition scheme that allowed its parent company to meet or exceed analyst expectations. The SEC alleges that, from at least January 2013 through to July 2016, Austal US’s former president, Craig D. Perciavalle, its current director of financial analysis, Joseph A. Runkel, and former director of the Littoral Combat Ships program, William O. Adams, engaged in a scheme to artificially reduce the cost estimates to complete certain shipbuilding projects for the US Navy by tens of millions of dollars. Mr Runkel’s employment was terminated following the SEC move and all three executives are no longer at the company. The complaint alleges that the executives knew that Austal US shipbuilding costs were rising and higher than planned, but they directed others to arbitrarily lower the cost estimates to meet Austal US revenue budget and revenue projections.
As the government prepares for a battle over its proposed superannuation tax changes on balances above $3 million, the Grattan Institute think tank has argued super reforms should go much, much further. The Grattan Institute says all superannuation income should be taxed, including in retirement. The report argues a 30% tax rate on super earnings should apply to balances above $2 million. In a pre-budget report outlining potential policy changes to the superannuation system, Grattan Institute researchers Brendan Coates and Joey Moloney argued forcefully that super required radical reform. The report notes that super tax breaks currently cost $45 billion a year in foregone revenue and will soon exceed the cost of the age pension. Grattan’s first proposal is to lower the threshold and increase the tax rate on super contributions from high-income earners. This would see anyone earning above $220,000 a year pay a 35% tax rate on income flowing into their super account, as opposed to the current rule that imposes a 30% tax rate on those earning above $250,000. The report estimated the new threshold would affect about 213,000 taxpayers, while the higher rate would affect about 707,000 taxpayers, all of whom would be within the top 10% of income earners, saving the budget about $1.1 billion a year. At the same time, Grattan proposed expanding the low-income superannuation tax offset from a maximum of $500 to $800, while making it accessible to people earning up to $45,000 a year (currently, it cuts out at $37,000). This change, it said, would benefit around 1.1 million low- to middle-income earners at a cost to the budget of around $530 million. Perhaps the most controversial recommendation was to abolish the tax-free status of superannuation earnings in retirement. This would affect around 2 million retirees, but Grattan said around 70% of the budget savings would come from the 20% of highest income retirees.
ANZ will need to convince the regulator that swallowing Suncorp would be better for competition than a merger between the Queensland group and a second-tier bank such as Bendigo and Adelaide Bank, or Bank of Queensland. The Australian Competition and Consumer Commission said it was unconvinced by ANZ and Suncorp’s arguments about the merger benefits. Deputy commissioner Mick Keogh said beyond technology, the big banks were not differentiated.
British billionaire Sanjeev Gupta’s GFG Alliance will spend up to $500 million on a new electric arc furnace at the Whyalla steelworks in South Australia as it phases out coal-based steelmaking in use since the mid-1960s. Mr Gupta said on Tuesday that Liberty Steel, GFG’s steel unit, had ordered an electric arc furnace from Italian manufacturer Danieli, and that it aims to have it running at Whyalla by late 2025, a big step forward in the company’s “green steel” ambitions. He also revealed longer-range plans to establish a direct reduction iron plant to process magnetite ore from GFG’s nearby mine in the Middleback Ranges. The overall investment is likely to top $1 billion across both projects. Electric arc furnaces make steel from melted scrap metal instead of iron ore. The Whyalla steelworks has used coking coal ovens and a blast furnace since its inception in 1965 when it was owned by BHP. Mr Gupta said the 160 tonne electric arc furnace would lift steelmaking capacity at the Whyalla plant from 1 million tonnes annually to about 1.5 million tonnes. He said the modernisation would let the company cut direct carbon emissions from steelmaking at Whyalla by about 90 percent. Liberty Steel is one of the 215 highest carbon emitters under the federal government’s safeguard mechanism scheme.
Government financial assistance to encourage mothers and the jobless to work more may need to be funded by reducing tax breaks for investors. This includes higher taxes on “passive income” such as trust funds, Treasury secretary Steven Kennedy has signalled. It would pay for incentives to bring tens of thousands of women and those on welfare into a jobs market screaming out for more workers. In comments previewing the Albanese government’s employment white paper, due in September, Dr Kennedy said the tax-transfer system was discouraging secondary earners and people on government benefits from working more. A secondary earner, who are mainly women, working more than one day a week on a full-time equivalent salary of $60,000 loses 60% to 80% of their income due to higher income tax, the withdrawal of family payments and childcare costs. Kennedy said about 70% of Australian women held down a job, a proportion similar to women in the United States, Canada, New Zealand and the UK. But Australian women were much less likely to work full time, with Kennedy arguing they faced substantial financial disincentives to pick up additional days. A single person on JobSeeker with no children and on an annual income of less than $33,000 faces an effective marginal tax rate of more than 60% on each dollar earned. Meanwhile, Australian women with children are less likely to be in full-time employment than in places like New Zealand, the United States, Canada and the United Kingdom.
Social media app TikTok will reportedly be banned from Australian government-issued devices over security concerns. Prime Minister Anthony Albanese has issued the directive following a review by the home affairs department into the risks posed by the Chinese-owned app, according to media reports on Monday evening. The ban would apply to mobile phones and other devices issued by the government for politicians and public servants. According to the reports on Monday, state and territory governments received a briefing on Monday about the federal ban and are expected to follow through with similar rules for their officials. The announcement of the ban is expected to be made as early as Tuesday. AAP has contacted the government for comment. The move follows the United States, Canada, New Zealand, and the European Union prohibiting government employees from having TikTok on work-issued devices. Concerns over TikTok relate to the potential for data to be harvested and accessed by the Chinese government under national laws that can compel companies to hand over information.
And that’s it for this week. And next week, I’ll be talking to Sharon Morris, General Manager, Australia & New Zealand at Chartered Institute of Procurement & Supply talking about the importance of social procurement. And I’ll be talking to economist Nicholas Gruen about the future board of the RBA.
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.
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Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week.