Stagflation. And when the Bank for International Settlements starts talking about it, you know it’s real.
Welcome to Talking Business, a podcast produced in Melbourne Australia. The podcast is available on the Acast site, my own website, the Apple Podcast store or wherever you go to get your podcasts. Or you can get it at the Business Acumen website at www.businessacumen.biz.
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 22 in our series for 2022 and today’s date is Friday July 1.
Today, I’ll be talking to Justin Webb, co-founder and Chairman of AgriWebb, a data-driven software platform committed to delivering the digital future of agriculture; transforming global cattle, sheep & dairy production helping farmers with profitability, provenance and sustainability across the supply chain.
And I’ll be talking to RMIT economist Jonathan Boymal about the outlook for house prices across Australia.
But now, let’s talk to Justin Webb.
The bad news on inflation just keeps coming. At more than 9% year on year across the rich world, it has not been this high since the 1980s—and there have never been so many “inflation surprises”, where the data have come in higher than economists’ forecasts. Central banks are raising interest rates and ending bond-buying schemes, crushing equities. Consumer confidence in many places is now even lower than it was in the early days of the covid-19 pandemic. “Real-time” economic indicators of everything from housing activity to manufacturing output suggest that economic growth is slowing sharply. Inflation worry-warts can point to three other indicators suggesting that the rich world is unlikely to return to the pre-pandemic norm of low, stable price growth any time soon: rising wage growth, and increases in the inflation expectations of both consumers and companies.
Leading economies are close to “tipping” into a high-inflation world where rapid price rises are normal, dominate daily life and are difficult to quell, the Bank for International Settlements warned on Sunday. In its annual report, the BIS, the influential body that operates banking services for the world’s central banks, said these transitions to high-inflation environments happened rarely, but were very hard to reverse. Diagnosing that many economies had already embarked on the process, the BIS recommended that central banks should not be shy of inflicting short-term pain and even recessions to prevent any move to a persistently high-inflation world. The BIS said the key for central banks is to act quickly and decisively before inflation becomes entrenched. Central banks around the world have started to raise rates quickly in response to soaring inflation, with the US Federal Reserve leading the pack, but the action taken so far does not satisfy the BIS. In its report, the bank said that there was a deep, “inherently stagflationary” shock hitting the world from higher commodity prices, supply chain bottlenecks and shortages stemming from Russia’s invasion of Ukraine. This had increased the prices of the goods and services that households noticed the most, reinforcing the salience of price rises. “We may be reaching a tipping point, beyond which an inflationary psychology spreads and becomes entrenched. This would mean a major paradigm shift,” the report stated. Such a shift would mean leaving behind a world where prices have been generally stable, with some things getting cheaper and others more expensive. In this benign world, central banks have been able to ignore temporary surges in oil or natural gas prices because “economy-wide inflation [is] less noticeable [and] also less relevant”.
Russia defaulted on its foreign-currency sovereign debt for the first time in a century, the culmination of ever-tougher Western sanctions that shut down payment routes to overseas creditors. For months, the country found paths around the penalties imposed after the Kremlin’s invasion of Ukraine. But at the end of the day on Sunday, the grace period on about $100 million of snared interest payments due May 27 expired, a deadline considered an event of default if missed. It’s a grim marker in the country’s rapid transformation into an economic, financial and political outcast. The nation’s eurobonds have traded at distressed levels since the start of March, the central bank’s foreign reserves remain frozen, and the biggest banks are severed from the global financial system. But given the damage already done to the economy and markets, the default is also mostly symbolic for now, and matters little to Russians dealing with double-digit inflation and the worst economic contraction in years. Russia has pushed back against the default designation, saying it has the funds to cover any bills and has been forced into non-payment. As it tried to twist its way out, it announced last week that it would switch to servicing its $40 billion of outstanding sovereign debt in rubles, criticizing a “force-majeure” situation it said was artificially manufactured by the West.
The Albanese government is confident of a reasonably swift conclusion to the free trade agreement being negotiated with Europe after it patched up relations with France over the cancelled submarines contract. After the French placed a block on negotiations between the European Union and Australia in retaliation to what it claimed to be treachery by the Morrison government, Prime Minister Anthony Albanese said it was not just keeping France on board as a security partner that mattered. Mr Albanese, who is in Madrid for the NATO summit, will fly to Paris later in the week at the invitation of French President Emmanuel Macron. Officials said with the change of government and the new spirit of détente between France and Australia, there were clear signs from the EU about proceeding with FTA negotiations.
Treasurer Jim Chalmers says easing the rules around pension eligibility to make it easier for older Australians to work more without losing benefits to help ease chronic labour and skills shortages will be discussed at this year’s national employment summit before October’s budget. This will see more than 400,000 people over the age of 65 returning to the nation’s workforce without losing benefits. The proposal from business groups late last year was not taken up by the former government. The Australian Chamber of Commerce, Australian Industry Group and the Council of the Ageing on Sunday have thrown their weight behind the idea, saying that, alongside expanded childcare, it’s an “obvious” policy lever to expand the workforce.
Power generators are devising a plan to raise price caps in the national electricity system, so that they can make a profit while providing power to avoid a repeat of the market suspension and ease an ongoing energy crisis. When regulators imposed an administered price cap of $300 per megawatt hour for the first time a fortnight ago, in a bid to calm a volatile market after a period of unusually high wholesale prices, it resulted in generators withholding more than 10% of supply because companies could not profit on high-cost generation and feared running out of fuel. That supply standoff led to the Australian Energy Market Operator suspending the market. As a result, generators are now privately discussing pushing for a doubling of the price cap to $600/MWh to enable sufficient supply. Gas-fired generators recently needed a price of $500/MWh to turn a profit given soaring spot prices for the fossil fuel. An approach could be made to ask AEMO itself to request a quick change to the rule. The issue may be raised with state and federal energy ministers ahead of their next meeting on July 20.
Analysis by the Federal Government’s Workplace Gender Equality Agency shows a gender pay gap of about $40,000 a year for people aged 45 to 65, while women who reach senior executive roles are taking home nearly $100,000 less per year on average than their male counterparts. The new data shows women are still earning consistently less than men in every age bracket. The agency’s new data report, called Wages and Ages: Mapping the Gender Pay Gap by Age, shows the pay gap widens substantially when women turn 35. It sees women earning $7.78 for every $10 earned by their male counterparts. The disparity worsens over the next 20 years, with a slight improvement once women turn 65, but never reaching parity. If these trends continue, Millennial women in the workforce will earn just 70% of men’s earnings by the time they reach age 45.
Treasurer Jim Chalmers has signalled his interest in shaking up the business-dominated board of the Reserve Bank of Australia to ensure its diversity is representative of industries, workers, geography and gender. This follows Australian Council of Trade Unions secretary Sally McManus and former RBA governor Bernie Fraser calling for worker representation on the committee that sets interest rates. This also comes after RBA governor Philip Lowe sought to cap wage growth at 3.5% and warned against bigger across-the-board pay increases that could fuel a 1970s-style wage-price spiral. Chalmers said the planned independent review of the RBA would consider the composition and size of the nine-member board to make sure it was representative of the economy, geography and gender. The Treasurer will have the opportunity to appoint two board members when the terms of Fortescue Metals Group deputy chairman Mark Barnaba and businesswoman Wendy Craik expire in August this year and May next year, respectively. He said he was “open-minded” about restoring worker representation to the RBA board,. However, he said he did not believe in “standing positions” and would consider appointments on a “case by case” basis.
BHP will spend $US4bn by the end of the decade to reduce its carbon emissions, and give its shareholders an annual scorecard on its performance on key social and environmental issues, as the company bets that reforming the mining sector’s image will help it keep delivering dividends to shareholders. According to a new set of environmental and social achievement guidelines introduced by the mining giant, by next financial year any mining project BHP considers for development will need to demonstrate it will help the company meet its decarbonisation goals to win further funding, the company said on Tuesday. By 2024 the mining giant will have built at least one pilot steel plant that helps the industry carbon neutral. Russia’s invasion of Ukraine, and the sharp spike in global energy prices that followed, has meant the growing investor and community pressure on major miners such as BHP to abandon fossil fuels and decarbonise their operations has largely taken a back seat to more immediate community concerns around energy pricing and security. But, in an investor presentation on Tuesday, BHP chief legal and governance officer Caroline Cox told analysts and investors the company’s “social value” framework would become an increasingly important part of BHP’s decision making process, with the company committing to look at the broader impacts of its decisions, and not just the immediate financial returns.
The Queensland finance conglomerate Suncorp is making a fresh push to spin off or sell its banking unit and focus on its insurance arm to try to boost returns for shareholders. A sale of Suncorp Bank has long been the subject of speculation, with Macquarie Bank, AMP, Bank of Queensland and Bendigo and Adelaide Bank all mooted as merger partners. Of the major banks, ANZ might be in the running.
The boss of IGA operator Metcash says Australians’ preference for shopping locally has propelled the retailer into a strong position to handle tough economic challenges on the horizon. “[Our sales are] showing that shoppers are sticking with independent stores and that trend is now becoming a habit,” chief executive Doug Jones told analysts after revealing the company’s 2.7% lift in annual profits on Monday. As well as supplying the IGA supermarkets and other independent players such as Foodworks, Metcash also operates the Independent Hardware Group, which owns the Mitre 10 and Home Timber & Hardware brands and also has an 85% stake in the Total Tools chain. The company’s food retailers saw an earnings jump of 4.1%, while liquor was up 9.8% and hardware sales were 40.7% higher as the company’s IHG and Total Tools businesses benefited from the residential construction boom.
Australia’s greenhouse gas emissions increased in 2021 as the removal of Covid-19 restrictions triggered a rebound in pollution levels from the transport, manufacturing and gas sectors which offset falls from electricity generation. National emissions in 2021 rose by 0.8% or 4.1 million tonnes of carbon dioxide, This was equivalent, to 488 million tonnes, while an increase of 2% has been forecast for the year to March 2022, the federal government said. The Albanese administration blamed the rise on the Coalition’s failure to deliver a coherent climate policy. Nonetheless, the figures show the scale of the challenge for Labor to deliver on its pledge for a 43% cut on 2005 emission levels by 2030. Australia’s greenhouse gas emissions are currently 21.4% below 2005 levels, the benchmark year used for the Paris climate change agreement, while both Labor and the Coalition have a target of net zero emissions by 2050.
The total value of the private hospital real estate sector is expected to hit $41 billion by 2041 – a rise of 63% in less than 20 years – on the back of investment in new facilities to cater for the medical needs of an ageing population and a rise in the take-up of private health insurance by younger Australians, according to analysis by JLL. According to JLL’s 2022 Australian Healthcare Real Estate Report, there are more than 30,000 beds across 155 general overnight private hospitals, 35 rehabilitation clinics and 45 specialist mental health facilities in Australia. An additional 2200 additional private hospital beds are due to be developed over the next eight years to meet rising demand, the JLL report says. However, only 280 beds are currently under construction with many projects in the planning stage, and awaiting a confirmed operator to proceed. This constrained supply, along with favourable investment metrics such as long leases of 20 to 30 years to single operators, has turned the once niche asset class into a mainstream investment for many institutional portfolios.
The size of Australian households has declined over the past five years, a shift that may have accelerated during the pandemic, increasing demand for housing and sending rents sky-high even as overseas migration fell sharply. Census data released on Tuesday also reveals that formation of single-person households has significantly out-paced the creation of one-bedroom homes, a disconnect which shows housing construction is out of step with needs, according to some analysts. In rounded numbers, the average number of people comprising each household has fallen from 2.6 to 2.5 people. Although the shift appears marginal, it could equate to nearly 200,000 homes.
Ride-sharing giant Uber and the Transport Workers’ Union have struck a landmark agreement on proposed employment standards and benefits ahead of expected new gig economy regulation from the Albanese government. The union and Uber have also agreed to jointly support the creation of a new independent government-funded regulatory body to create industry-wide standards for ride share and food delivery gig workers following months of negotiations. Under the agreed standards, the body will be responsible for creating minimum and transparent enforceable earnings, benefits and conditions for people who work on the ride-share platform. The body will also act as a means for resolving disputes over platform employment issues, such as when a worker’s account is deactivated. The standards also outline that the rights of workers to join and be represented by a union will be respected.
Women are still being forced to spend $620 to obtain a surgical abortion in some states despite the fact it is available under Medicare in Australia. In NSW, one of the largest providers, Marie Stopes, offers an abortion in the first trimester starting at $620 for those with Medicare. For those who do not have a card, such as asylum seekers on temporary protection visas, they could face upfront costs of more than $800. Independents Monique Ryan, Zali Stegall and other crossbench MPs are considering asking the parliamentary library to research abortion costs, availability and legislative framework in each. It comes as protests are organised this week across Australia against the US Supreme Court overturning the right to abortions.
And that’s it for this week. And next week, I’ll be talking to Garret Flower, CEO and Founder of ParkOffice.io which uses a COVID-19 focused solution allowing employers to track which staff members require parking at the office on a given day. An algorithm then allocates available parking to those who are most vulnerable or whose need is greatest. By leveraging the ParkOffice solution, companies will be able to increase parking availability by up to 40%. ParkOffice is a leading parking management software solution for smart offices that optimizes employee parking by assigning and releasing parking spaces as required, reducing administrative costs, and adding value to real estate.
And I’ll be talking to AMP Capital chief economist Shane Oliver about how the market is performing.
Wishing you all a safe and healthy week. And looking forward to bringing you Talking Business next week.