Australia is set to lose its AAA credit rating because of ‘Climate Change’.
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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 30 in our series for 2023 and today’s date is Friday August 25
First, I’ll be talking to Frank Greeff, the head of industry at Domain, Australia’s digital property portal and associated real-estate industry business. And I’ll be talking to Indeed economist Callam Pickering about the latest wages and jobs figures.
But first, let’s talk to Frank Greeff.
So what’s happening in the news?
China’s $18 trillion economy is decelerating, consumers are downbeat, exports are struggling, prices are falling and more than one in five young people are out of work. Country Garden Holdings Co. with 3,000 pending property projects up and down the country, is on the cusp of default and protestors have gathered at Zhongzhi Enterprise Group Co., one of the biggest shadow banks demanding their money as payments are halted. China is undergoing an “expectations recession,” said Bert Hofman, former China country director at the World Bank. “Once everybody believes that growth will be slower going forward, this will be self-fulfilling.” In the worst-case scenario, this dynamic ends in stagnation, or “Japanification,” something some economists see a warning of in China’s latest consumer price data showing deflation. Falling prices are both a symptom of weak demand, and a drag on future growth as households delay purchases, business profits fall and real borrowing costs rise.
Optus has become the most distrusted brand in Australia in the wake of its high-profile data breach last year, according to the latest Roy Morgan data, displacing Facebook for the first time since the survey began. Fellow hack victim Medibank also made the Top 10 Most Distrusted Brands after its security was compromised shortly after, coming in at number six. The data breaches, which exposed the personal information of millions, had left a lingering scar on both companies, Roy Morgan said. The latest ranking change for Optus spelled continued bad news for the telecommunications industry, which Roy Morgan found had become the most distrusted sector in February and continued to hold the position in the year to June thanks to a third place for Telstra. The rankings, which assess net trust/distrust over a 12-month period, show the cumulative impact of negative publicity. Social media also performed poorly with Facebook in second spot and TikTok deteriorating five places to become the eighth most distrusted brand. The survey put Twitter/X at tenth although it predated Elon Musk’s rebranding of the platform. Roy Morgan said outside the top 10, the reputation of Qantas continued to deteriorate from 19th in the previous survey to 13th, and for the first time it surpassing its own budget airline Jetstar at 16th. Other poor performers included NewsCorp and Amazon. Supermarket and retailers dominated the Most Trusted Brands Top 10, with Woolworths, Coles, Bunnings, Aldi and Kmart taking out the top five places. Outside of the top 10, the banks picked up minor places with Bendigo Bank at 16th, the Commonwealth Bank at 17th (up from 20th) and ING at 19th
Australia will lose its triple-A credit rating by the end of the decade, driving up the federal government’s interest bill and the cost of borrowing for major companies as climate change undermines the economy and tax base. Ground-breaking research suggests Australia is likely to be one of the worst-affected countries as taxpayers worldwide face paying more than $US1 trillion ($1.6 trillion) a year in extra interest on government debt if global temperatures climb unabated. While there have been previous estimates of the broad economic impact of climate change, the research paper “Rising Temperatures, Falling Ratings: The Effect of Climate Change on Sovereign Creditworthiness” is the first to look at its impact on government credit ratings. Researchers from the universities of Oxford, Cambridge, Yale and East Anglia looked at how credit ratings – used by investors to determine the ability of a country to repay its debt – would change if global temperatures increase by either two degrees or five degrees over the rest of this century. Two of the authors, Matt Burke and Patrycja Klusak, said Australia’s federal taxpayers and businesses would be among the worst affected by a credit rating downgrade caused by climate change.
The nation’s energy market operator is poised to issue a stark warning about threats to supply in the electricity grid and will make an urgent call for business and investors to proceed with planned generation projects amid concern about a rough transition to green power. The Australian Energy Market Operator will issue its 10-year outlook for the market – the Electricity Statement of Opportunities – before the end of August. Industry sources expect the forecast to spell out ongoing reliability risks in the system, including a potential crisis this summer, along with the need for industry to urgently approve a pipeline of developments. The document will be closed scrutinised by the NSW government as it nears a decision on Origin Energy’s Eraring coal-fired power station, which could close up to seven years early in mid-2025. The AEMO report is developed through consultation with Australia’s energy industry, and the market operator is expected to warn of larger potential shortfalls if significant progress on urgent projects is not made. AEMO last year said every state within Australia’s National Electricity Market could experience shortfalls in supply over the next decade, with South Australia potentially first by 2024.
Australia’s economic growth will be significantly slower over the next 40 years, due to an ageing population and lower population, putting pressure on governments to reform taxes, show budget discipline, and lift productivity, workforce participation and migration rates. The latest intergenerational report forecasts annual average growth of 2.2% over the next 40 years, which would be the lowest since World War II, and 0.9 percentage points lower than the average annual growth of the past 40 years. It is also lower than the 2.6% average annual growth rate forecast by the previous report that was released in 2021 by the Morrison government. The difference between the two forecasts is due to the Albanese government lowering the productivity growth assumptions underpinning the budget from 1.5% to a more realistic 1.2%. The latest report also makes the case for the stage three tax cuts which begin next year, as well as ongoing tax relief thereafter, to ensure the ever dwindling proportion of workers is not suffocated by income taxes climbing as a proportion of GDP. The report, which is being rolled out over the course of this week by Treasurer Jim Chalmers, is an exercise by Treasury to forecast over the next 40 years the key structural pressures in the budget. It forecasts a doubling of people older than 65 and a tripling of those aged over 85. The top five pressures on the budget – the NDIS, interest payments on debt, defence, aged care and health – will cost collectively an extra $141 billion a year in today’s dollars by 2062-63. Its population forecasts are also in line with the 2021 document with a prediction Australia will have 40 million people by 2062-63. The intergenerational report released in 2015 forecast a population of almost 40 million by 2054-55, almost 10 years earlier than now expected. Although economic growth will be slower over the next 40 years, the economy is expected to be about two and a half times larger in 2062–63 than in 2022–23, in real terms. Dr Chalmers said the low growth forecasts and building budget pressures were a wake-up call and that his predecessors had masked the extent of the challenge with overly optimistic productivity assumptions of a 1.5% growth rate. The intergenerational report says tax receipts are projected to exceed the Coalition’s self-imposed cap of 23.9% of GDP to 24.4% of GDP over the next 10 years and then stay at that level until 2062-63 as traditional revenue sources dry up due to decarbonisation and governments continue to cut income tax.
Australia’s dirtiest power station – the 2.2GW Loy Yang A brown coal generator in Victoria – will continue to operate until 2035 under a new deal struck with the state government which effectively kills hopes that Australia could reach 100% renewables before that date. The 2035 closure date is consistent with AGL’s commitment announced nearly a year ago, when it brought forward the closure date by a decade under pressure from activist shareholder Mike Cannon-Brookes, and climate campaigners and scientists. There was hope that this closure date could be brought forward. The deal with the Victoria government effectively kills this hope, and includes unspecified compensation from the state if – as widely expected – Loy Yang A struggles to make money in a grid increasingly dominated by renewables, and rooftop solar.
Billionaire Solomon Lew has flagged that his company Premier Investments could be demerged from its low-growth portfolio of apparel fashion stores – Just Jeans, Jay Jays, Portmans, Dotti and Jacqui E. In a flurry of announcements to the ASX – which included the shock resignation of Richard Murray as the chief executive of its retail arm, Premier Retail, after only two years in the role – Premier Investments revealed a strategic review would now consider a review of its operating and capital structure, including dividend policies and “a separation of the group into two or more distinct entities by way of demerger”. Happy days for UBS deal makers Kelvin Barry and Jon Mant, who have snagged the lucrative gig of advising Premier Investments on whether to split the Solomon Lew-controlled retail and investment group into four separate ASX-listed companies. Executives at the various brands being considered for a spin-off – Peter Alexander, kids’ stationery shop Smiggle and Premier’s remaining retail brands, including Just Jeans, Portman and Jacqui-E – have yet to be consulted. UBS is expected to keep working on the project until at least the middle of next year, and that was a “conservative estimate”, according to one source close to the deal. No doubt there will be plenty of conjecture about what each of the spin-offs would be valued at. According to brokers at Unified Capital Partners, Smiggle could be worth some $1.19 billion in its own right. Peter Alexander, which sells luxury sleepwear, would be valued at $1.59 billion, while the remaining apparel brands would be worth $915.5 million, they said. Adding in property holdings, Premier’s massive cash pile – estimated to be some $477.7 million this financial year – and the stakes in Myer and Breville, the entire company could be worth a round $5.33 billion. At more than $30 per share, Lew’s personal fortune would grow by some $500 million. Coincidentally, that’s just about the market capitalisation of Myer. Premier, which would return to being an investment vehicle under the proposal, already holds a 26% in the department store and Lew has finally succeeded in getting his favoured candidate onto the company’s board.
And the profit reporting season continues. BHP’s annual underlying profit slumped 37% to $US13.4 billion ($A20.9 billion). Woodside Energy’s net profit excluding one-offs rose 4% to $US1.9 billion. Kogan.com’s gross sales dropped 28.4% to $844.8 million and revenue declined 31.9% to $489.5 million. Lithium producer Alkem reported full-year profit of $US524.6 million ($A817.85 million) and record group revenue of more than $US1.2 billion. Westfield owner and operator Scentre has recorded a 68.9% drop in its interim statutory profit to $149.4 million. Disinfection device maker Nanosonics profit after tax rose to $19.9 million, up from $3.7 million a year earlier. Coles Group has posted a 5.2% rise in group revenue to $41.83 billion, underpinned by its supermarkets where sales gained 6.1% to $36.75 billion for the 2023 fiscal year. Woolworths increased profit 5% to $1.6 billion. Redbubble reported an EBITDA loss of $40.7 million, from a loss of $11.2 million the previous fiscal year. Car dealer group Peter Warren reported a 0.3% decline in net profit after tax to $56.4 million for the 12 months ended June 30. Perth-based engineering group Monadelphous’ profits rose 2.5% on a year earlier to $53.5 million. Estia Health reported a net loss after tax of $33.9 million for the year ended June 30, compared with a loss of $52.4 million for the prior year. Childcare giant G8 Education’s statutory profits for the past six months have lifted from $8.5 million to $15 million. Investment platforms business Hub24 has posted a surging net profit up 160% to $38.2 million in financial 2023 on sales up 45% to $279.5 million. AUB Group reported underlying net profit after tax (NPAT) of $129.1 million for the 2023 financial year, up from $74 million the previous year. Cloud connectivity provider Megaport reported a net loss of $9.8 million for FY23; an 80% difference from the $48.5 million loss a year earlier. Charter Hall posted a statutory profit of $196.1 million.Westpac has booked a net profit for the third quarter of $1.8 billion. Australia’s largest outdoor media company, oOh!media reported revenue of $296.6 million for the first six months of 2023, up 7% on the year before. Its adjusted earnings before interest, taxation, depreciation and amortisation fell 4% to $49.6 million, while its adjusted net profit rose $0.1 million to $20.5 million. Plumbing supplies group Reliance Worldwide’s net profit after tax was up 2% to $US139.7 million. Appliance group Breville’s net profit after tax for the 12 months ended June 30 was up 4.2% to $110.2 million, while revenues were 4.2% higher at $1.48 billion. Homewares retailer Adairs’gross profit jumped 5.8% to $285.5 million. Health insurer NIB has lifted underlying operating profit 11% to $263.2 million. Australia’s largest steelmaker Bluescope announced a 64% drop in net profit after tax to $1.01 billion. New Zealand’s biggest telecommunications group Chorus, which is dual-listed in New Zealand and Australia, has delivered a 61% slide in net profit to $NZ25 million ($23.1 million.) Sydney-based insurance giant IAG, behind brands including NRMA and CGU, said its profits had risen to $832 million for the 12 months to June, up from $347 million. Ampol has reported a 26% fall in annual profits. Residential developer AV Jennings reported a 72% rise in profit before tax of $31 million for the year to June. A2 Milk company’s Group EBITDA gained 11.8% to $NZ219.3 million. Financial software and data firm Iress reported a net loss of $139.8 million. Professional audio-video systems Audinate’s gross profit increased by 34% to $US33 million. New Hope posted underlying EBITDA of $267.7m for the quarter ended July. Agribusiness group Elders has downgraded its profit forecasts, citing weaker-than-expected sales in its rural products division and pressure on margins in crop protection and farm chemicals. Premier Retail saying it expected full-year earnings of $355m to $357m, up between 6% and 6.6% on 2022. Real estate agency McGrath reported a 47% drop in statutory net profit to $6.2 million for the 2023 financial year, and a 77% decline in underlying profit to $2.6 million, dragged down by historically low listings and rising interest rates. Viva’s net profit after tax collapsed 51% to $355.4 million, while EBITDA dived 41% to $361 million, down on the $611 million reported in the previous corresponding period. ARB Corporation’s net profit after tax dropped to $88.4 million. Ingenia Communities reported an underlying profit of $84.7 million for the full-year ending June 30, down 4% on the prior year. Alumina group reported a net loss after tax of $US43 million ($A67 million) for the six months to June, down from $US168 million in the previous corresponding period. APA Group statutory net profit rose to $287 million in the 12 months ended June 30, from $259.7 million. SkyCity has reported a net profit of $NZ8 million ($7.4 million). Pot stock Vitura Health has posted a net profit up 128% to $13.3 million. Non-bank lender Pepper Money profits fell 28% to $52 million in the six months to June. Hotel booking software company SiteMinder has reported a net loss of $49.3 million for FY23. Dominos suffered a 74% tumble in net profit after tax to $40.6 million for the 12 months ended June 30. Corporate Travel Management’s underlying earnings before interest, tax, depreciation and amortisation were $167.1 million. Global logistics software company WiseTech Global reported a 9% jump in its full year profit to $212.2 million. Santos net profit dropped to $US790 million ($A1.23 billion) in the six months ended June 30, from $US1.17 billion in the first half last year. Global engineering group Worley’s annual net profit slid 78% to $37 million. The Lottery Corporation’s net profit fell 23.6% to $264.8 million. IDP Education reported a 45% on-year in adjusted NPAT to $154m. Iluka declared a $203.8m half-year profit, down 44% from the first half of 2022. ASX‑listed alternative asset manager HMC Capital’s revenues fell 13% to $68.7m and profit was down 26% to $57.1m. Bathroom fixtures and fittings company Reece Group’s net profit after tax was down 1.2% to $387.6 million for the 12 months ended June 30.
And that’s it for this week. And next week I’ll be talking Danielle Harmer from Domain. Danielle is General Manager Product for all of Domain’s Agent Products, along with the GM of Allhomes. And I’ll be talking to Rabobank economist Michael Every about China’s economic crisis.
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