Warnings that the pain of this economic downturn will be more widespread and hit consumers harder than the GFC, and the rise in company collapses may soon spread from small to large firms.

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 or at Banking Day.

For the most exclusive access to leading economists and business leaders from around the world, subscribe  to Talking Business from my website leongettler.com.

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 23 in our series for 2024 and today’s date is Friday July 5

First, I’ll be talking to to Deborah Rathjen, the CEO of biotech firm Carina, a Australian clinical stage immunotherapy company researching and developing CAR-T therapies for personalised cancer immunotherapy treatment.

 

And I will talk to economist Nicholas Gruen about why Australia’s anti-corruption watchdog and the Public Service Commission took no action over the Robodebt commission’s findings on the scandal.

But first, let’s talk to Deborah Rathjen

So what’s happening in the news?

Financial giants from Goldman Sachs, to Morgan Stanley and Barclays are taking a fresh look at how a Donald Trump victory in November could play out in the bond market. After last week’s debate hurt President Joe Biden’s chances of winning reelection, Wall Street strategists are urging clients to position for sticky inflation and higher long-term bond yields.  At Morgan Stanley, strategists including Matthew Hornbach and Guneet Dhingra in a weekend note argued that “now is the time” to wager on long-term interest rates rising relative to short-term ones.” Trump’s rise in the polls since Thursday’s debate means investors have to contemplate economic policies that could lead to more rate cuts from the Federal Reserve, along with a Republican sweep that leads to fiscal expansion and pressures longer-term bond yields higher, Morgan Stanley said.  Barclays, meanwhile, said that the best response to the rising prospect of a Trump victory is to hedge against inflation. Strategists Michael Pond and Jonathan Hill wrote Friday that the clearest expression is a wager that five-year Treasury inflation-protected securities, or TIPS, will outperform standard five-year notes. Buy-side investors like Jack McIntyre, a portfolio manager at Brandywine Global Investment Management, are increasingly taking note.  McIntyre said he “is worried that the bond vigilantes are coming out early in response to the debate fall out.” The odds of a Republican sweep in November will increase from a combination of “Biden’s performance, weaker data, higher oil prices.” US Treasuries fell on Monday, pushing yields to the highest levels in weeks, in what traders said was ongoing fallout from last week’s bump in the odds of a second Trump term. Treasuries extended their losses after the Supreme Court ruled in a case that will limit the chances that Trump will face trial before the November election on charges for attempting to reverse the 2020 election results. The uptick in Treasury yields was led by the longest maturities, with 30-year bond yields up as much as nine basis points to a session high of 4.65%, the highest level since May 31. Not all on Wall Street are convinced that higher long-term Treasury yields and steeper curves are inevitable. “While a term premia-driven selloff has been consensus for how US yields should react to a Republican victory, we see arguments for flattening risk,” Goldman Sachs strategists led by George Cole and William Marshall wrote after the debate. They see investor focus shifting away from fiscal spending and towards the risks of higher tariffs, which are likely to weigh on productivity and growth as the election comes into view.

Central banks should avoid cutting interest rates too soon owing to the risk of a fresh flare-up in inflation, the Bank for International Settlements has warned, as policymakers around the world weigh up how quickly to ease monetary policy. The Basel-based umbrella body for central banks said in its annual report that the global economy looked set for a “smooth landing” as inflation cooled and growth remained resilient. But it urged rate-setters to set a “high bar for policy easing”, warning of the risk of a resurgence in areas such as services prices and wage growth, as well as the need to maintain some room to slash borrowing costs in the event of a sudden downturn. It also warned that the financial system remained vulnerable, particularly to high levels of public debt and falling commercial property prices. “A premature easing could reignite inflationary pressures and force a costly policy reversal — all the costlier because credibility would be undermined,” the BIS said. BIS general manager Agustín Carstens praised the “forceful tightening” that eventually ensued, arguing it reinforced central banks’ credibility and pre-empted a shift to a “high-inflation regime”. But the BIS warned top officials to remain on guard for a return of inflationary pressures even as some central banks had already started to ease policy. The ECB began to cut rates in June while the Fed is expected to lower borrowing costs as soon as September. Comparing a central banker fighting inflation with high interest rates to a doctor giving antibiotics to a patient with an infection, Carstens told reporters: “You have to do the whole treatment otherwise inflation might come back.”

China’s factory production contracted for a second straight month in June, signalling weakness in an area that Beijing is betting on to drive the economy of Australia’s biggest trading partner.  The official manufacturing purchasing manager index was at 49.5, the National Bureau of Statistics said on Sunday. That was the same reading as May, and in line with economists’ prediction in a Bloomberg survey. Any number above 50 points to an expansion. A sub-index of new orders at factories inched lower to 49.5 as demand weakened, while a gauge measuring new export orders was unchanged at 48.3. Meanwhile, the non-manufacturing measure of activity in construction and services fell to 50.5, the statistics office said. That compares with a forecast of 51, and a May reading of 51.1. China’s economy has performed unevenly this year, with manufacturing at times a bright spot while consumption has been weighed down by a prolonged real estate crisis. The continued contraction in the factory sector poses a threat to the country’s economic growth target of around 5% this year.  Trade tensions have added to the challenges. The US and European Union — two of China’s biggest export markets — have sounded the alarm over a surge in cheap Chinese exports, which they say are unfairly bolstered by Beijing’s massive subsidies. Both have threatened to impose tariffs on China’s electric car exports, along with other sectors where Beijing is leading on price.

The pain of this economic downturn will be more widespread and hit consumers harder than in the global financial crisis, and the rise in company collapses may soon spread from small to large firms, warns McGrathNicol chairman Jason Preston. Unlike the GFC, which was a top-down crisis caused by lax oversight of financial institutions that lent too much to low-quality borrowers who defaulted when house prices fell, this period of economic decline is “bottom-up”, he said. “From an everyday Australian consumer perspective, the GFC wasn’t that bad. We didn’t see high unemployment, and we didn’t see high inflation,” he said. “Whereas, what we’re seeing now is much the other way around. We’re seeing interest rates and inflation almost impact from the bottom up.” Mr Preston, whose firm was spun out of KPMG, said a sustained period of high inflation had dampened consumer spending to a point where companies were losing the confidence to invest. Last week’s jump in inflation above market expectations has put yet another interest rate rise on the table for August or September. That meant the tough conditions would continue for another 12 to 18 months – or worsen – and the rise in insolvency appointments seen in 2023-24 would spread, he added.

Artificial intelligence will create 200,000 jobs in Australia by 2030, according to a report backed by Industry Minister Ed Husic. More than 160,000 of those jobs will be in tech-related occupations, but the rest will be for non-tech roles such as sales managers, accountants and human resource managers, all of whom will be required to help pave the way for AI. The report, Meeting the AI Skills Boom, found that Australia and New Zealand already have the second-highest uptake of generative AI software anywhere in the world, with 84% of knowledge workers reporting they use software such as OpenAI’s ChatGPT, Microsoft’s CoPilot or Google’s Gemini for their jobs. Only Singapore workers reported a greater usage of generative AI, at 88%. But if there were even greater uptake of generative AI in Australia, it could contribute $115 billion to the economy, mostly through productivity gains, the report found. The report was prepared by the Tech Council of Australia, a peak industry body that represents the interests of huge AI companies such as Google, IBM and Microsoft, as well as Atlassian, Canva and Adobe, all of which use AI to automate tasks previously done by human workers. It was sponsored by Microsoft, which helped fund the development of OpenAI’s ChatGPT and which offers generative AI tools in all its software, as well as by the Microsoft subsidiary LinkedIn, and by Workday, which uses AI in its enterprise management software. Amian Kassabgi, chief executive of the TCA, said if the history of the tech sector showed anything, it was that far more jobs were always created by automation than were destroyed by it. But Mr Kassabgi said that even to reach the figure of 200,000 jobs, there needed to be a huge increase in the number of skilled AI workers in Australia, which at the end of 2023 sat at just 33,000. Much of the increase would need to come from reskilling existing tech workers, but some also needed to come from overseas, and a rethink of Australia’s skilled worker visa system was needed.

Following cyber attacks on MediSecure and  Monash Health, the Albanese Government has injected a long-overdue $6.4 million into boosting cyber security in Australia’s healthcare sector through an information-sharing network. Mirroring a model already used in the financial and critical infrastructure sectors, the pilot Information Sharing and Analysis Centre (ISAC) will focus on “cyber threats, responses and preventative measures” among health organisations. Minister for Home Affairs and cyber security Clare O’Neil said healthcare organisations’ “access to sensitive data”, and their “struggle with building and funding strong cyber protections”, had made them a threat target. “The last two years has been the beginning of a big, overdue national journey to lift up cyber security across the country to better protect our citizens,” she said in a statement. “Healthcare faces a vulnerability trifecta. Cyber criminals know that every Australian depends on these essential services – and that they cannot afford to be offline over extended periods.” O’Neil added that “government intervention to kick-start     [ISAC-like] networks in other high-risk sectors is long overdue”. This year, the health sector once again ranked top in the Australian Information Commissioner’s data breach reporting.

The Australian Securities and Investments Commission has found that the construction sector remains by far the single largest category of insolvency. Unprofitable building contracts, cost blowouts, planning delays, labour shortages, red tape and other challenges sent nearly 3000 building companies broke in the last financial year, new official insolvency figures show. According to corporate watchdog ASIC, there were 2832 construction industry insolvency appointments for the 2024 financial year until June 16, an increase of 28% on the 2213 insolvencies over the previous financial year. The next worst performer, accommodation and food services, had just under 1600 corporate failures.  Highlighting how sharp the downturn has been for builders since the cost of construction surged after the pandemic (resulting in many fixed-price contracts becoming loss makers), insolvencies have more than doubled from the 1200 failures recorded in the 2022 financial year.

The number of businesses on TikTok has jumped, with smaller firms joining corporates such as Telstra, Coles and Woolworths at the same time as the Victorian Chamber of Commerce strikes a deal to train owners on how best to use the social media platform. The chamber has announced a new partnership with TikTok to help business owners set up and understand the tips and tricks, amid warnings the platform can backfire for businesses that get it wrong and spark a cringe factor by trying to seem cool.  The deal comes after a survey of 47,000 members showed that expanding brand and marketing presence was the top priority of business, behind growing their revenue.  And while Facebook and Instagram remain the country’s most popular social media platforms, they are losing ground to TikTok, according to the latest We Are Social’s Digital Australia report. TikTok users have hit 9.7 million people, or a third of all Australians, and it has seen 17% annual growth. Users are also spending more than 42 hours on the platform per month, double the next platform, YouTube. While about 350,000 businesses in Australia use the platform, big business has been more cautious but increasingly say they can no longer ignore TikTok. ING is trialling Tik-Tok style videos on Linkedin for new job ads, using short and fun videos with local managers. Up bank, an independent arm of Bendigo & Adelaide Bank, launched a campaign that encouraged users to catch and munch flying coins. Telstra was an early adopter after identifying in 2020 that TikTok was quickly becoming the platform of choice for Gen Z and younger Millennials, “an audience we’ve historically struggled to reach and meaningfully connect with”, a spokesman said.

Australia’s peak research agency, CSIRO, has spent $15m on a new “supercomputer” that it says will speed up scientific discoveries, helping grow the national economy.  US tech titan Dell built the computer cluster, dubbed Virga – the meteorological effect of rain that evaporates before it reaches the ground. It features Nvidia H100 chips, which cost about $US25,000 each, which the agency says will allow it to complete power-hungry artificial intelligence workloads.  While AI has attracted much hype with the tech giants branding it on almost every new product, CSIRO says its application on the “high performance computer (HPC)” will deliver tangible results. Jason Dowling from CSIRO’s Australian e-Health Research Centre said medical imaging analysis was one application in which AI can deliver a significant benefit, effectively giving doctors a second pair of eyes. Elanor Huntington, CSIRO’s digital, national facilities and collections executive director, said AI was used in “practically all fields of research”, including developing flexible printed solar panels, vaccines, predicting fires and measuring wheat crops. “High performance computing systems like Virga also play an important role in CSIRO’s robotics and sensing work and are crucial to the recently launched National Robotics Strategy to drive competitiveness, and productivity of Australian industry,” Ms Huntington said. CSIRO said its high-performance computer – which has 94GB of high-bandwidth memory per graphics processing unit – will “significantly speed up AI performance”, training large models “within days or even hours”. Other hardware includes 4th Gen Intel Xeon Scalable processors.

 

And that’s it for this week.

And next week, I’ll be talking to Leslie Chong, the CEO/MD of Imugene and has been instrumental in building it from a new company with one technology to a leader in Australian biotech, with five different clinical trials underway targeting a multitude of cancer types.

And I will talk to economist Saul Eslake about how Australia will be fairing with the latest inflation figures

For the most exclusive access to leading economists and business leaders from around the world, subscribe to Talking Business from 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