Morrison’s re-election suddenly looks much worse with RBA raising its official cash rate to 0.35%, the first increase to rates in over a decade.
Welcome to Talking Business, a podcast produced in Melbourne Australia. The podcast is available on the Acast app, 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 14 in our series for 2022 and today’s date is Friday May 6.
First, I’ll be talking to Russell Martin, co-founder and CTO of digital expense platform DiviPay,who will share his 5 big lessons that small businesses can learn from.
And I’ll be talking to CommSec chief economist Craig James about his forecasts for the market in the week ahead.
But now, let’s talk to Russell Martin
The Chinese slowdown will weigh on the world’s economy. China’s stringent lockdowns to curb Covid-19 infections are taking a significant toll on the economy and roiling global supply chains, with President Xi Jinping under pressure to deliver on pledges to support growth. The damage from shutdowns in April in major financial hub Shanghai, auto manufacturing center Changchun and elsewhere was laid bare by the first official data for the month released over the weekend. Both manufacturing and services activity plunged to their worst levels since February 2020, when the nation imposed a range of restrictions amid its initial coronavirus outbreak centered in Wuhan, according to purchasing managers surveys. China’s challenges go beyond the latest lockdowns. The fallout from the war in Ukraine has pushed up costs for Chinese businesses and contributed to fading overseas demand for their exports. Regulatory crackdowns have hit high-growth sectors such as technology and education. Real estate, a primary driver of the nation’s economy, went into freefall last year as developers buckled under heavy debts and home sales slumped. Any sustained slowdown in China will be felt globally, depriving the world economy of one of its most dependable engines when inflation and war are raising recession fears in the US and Europe this year. The US economy shrank at a 1.4% annual rate in the first quarter, data released last week showed. China was projected to account for a quarter of global economic growth in the five years through 2026, according to data released by the International Monetary Fund last year.
Stagflation is again on the cards. After the double shock of Covid-19 and the Russian invasion of Ukraine, inflation rates have exceeded expectations, surging to the highest levels in decades in many countries, while economic growth forecasts are rapidly deteriorating. The prospect of stagflation’s return strikes fear into policymakers because there are few monetary tools to address it. Raising interest rates may help reduce inflation, but increased borrowing costs would further depress growth. Keeping monetary policies loose, meanwhile, risks pushing prices higher. Most analysts and economists, including the IMF, do not expect a rerun of the bad old days of the 1970s — a decade of economic blight that caused pain to households and businesses alike. Inflation is not yet as high as it was back then; more central banks are independent; and fiscal support is shielding the most vulnerable. But just as the oil crisis reverberated throughout the global economy in the 1970s, so has the double blow of pandemic and war put unprecedented pressure on the supply of goods and services around the world today. Even before war broke out in Ukraine, prices had risen to multi-decade highs in many countries, including the US, the UK and the eurozone, as the pandemic disrupted supply chains, boosted demand for goods and resulted in accommodative monetary policies and expansive fiscal stimuli.
The Reserve Bank of Australia is set for a string of interest rate rises over the next year potentially taking the cash rate to 2.5%, as the bank indicated Australia’s inflation outbreak will not be brought under control until mid-2024. The RBA is forecasting inflation to reach 6% this year. Strengthening inflation, prompted the central bank on Tuesday to raise the official cash rate by 25 basis points to .35%, the first such rise since November 2010 and the second time rates have risen during a federal election campaign. The other time was during John Howard’s unsuccessful bid to win re-election in 2007. Three of the four big banks have passed on the first interest rate increase in more than a decade to borrowers. The move came as little surprise to financial traders, who had priced in around a two-thirds probability of the RBA raising rates this month. This is the first step on the long march to a much higher cash rate. Markets are pricing in the virtual certainty of another rise in June, taking the cash rate target to at least 0.5% with the NAB expecting the cash rate to peak at 2.6% in 2024. Runaway inflation left the RBA with little choice but to hike rates in May. This rate hike will be the first of many over the next six-months as the Bank tries to curtail historically high inflation. Under the circumstances it was surprising that they didn’t hike more aggressively. Supply-chain disruptions and the Ukraine war has pushed inflation to its highest level since the introduction of the GST in 2000. Ignoring the GST – an intentional policy-driven spike in inflation – we haven’t seen economic-driven inflation this high since December 1990. Australia is dealing with something that simply hasn’t been part of the national economic discussion in a long-time.
One in 25 properties in Australia will be effectively uninsurable by 2030 due to worsening extreme weather caused by climate change, according to a study released by the Climate Council. In the worst affected areas, such as in the seat of Nicholls in Victoria, the figure is far higher, with 27% of properties found to fall into this high-risk category. In the seat of Richmond on the north coast of NSW, 20% of properties are considered high risk. Flooding from rivers was found to be the most common risk to Australian properties, followed by bushfire and then coastal inundation from sea level rise. The study conducted by Climate Valuation, a company that provides climate risk analysis to property owners, includes a map that allows readers to view data on the risk under different greenhouse gas emissions scenarios to their suburb, electorate or local government area for the years 2030, 2050 and 2100.
Twin threats of accelerating inflation and extreme weather events will heap pressure on Australia’s major insurers in the coming year, including when it comes to reinsurance negotiations, with global reinsurance giant Swiss Re warning prices must lift to match the “substantially” higher risks at play. Swiss Re last week forecast a stagflation-like global economic environment for 2022 and 2023, characterised by higher inflation and lower real GDP growth, and tipped the chance of a global recession over the next 12-18 months at 20-30%.. The impact on home insurance will be higher construction prices, a scenario already playing out across the east coast of Australia following weeks of heavy rains and flooding earlier this year. This could be a tipping point for the nation’s general insurers, with a big question mark over their profit outlook as they grapple with spiralling reinsurance costs.
Brad Banducci, the boss of supermarket giant Woolworths, has left the door open to further price increases as some of its largest suppliers are poised to request price bumps for a second time in coming months as they battle rising input costs. About 40% of Woolworths’ Australian supermarket suppliers have asked for an increase to prices. That represents 50% of its sales, which jumped 5.4% to $11.43 billion in the third quarter.
Future Fund chair Peter Costello has warned investors to brace for a challenging and volatile future as central banks move to raise rates to address inflation and the sovereign wealth fund posts negative returns for the March quarter. Costello, said investors should expect lower returns for longer, with rising inflation, higher interest rates and geopolitical uncertainty combining to create ongoing market uncertainty. Australia’s sovereign wealth fund suffered its largest quarterly loss in two years amid renewed geopolitical and monetary policy risks. Future Fund lost 1.5% in the three months to March 31, the biggest drop since the same period in 2020, causing its main fund to shrink to A$201 billion ($141 billion) from A$204 billion,. In a portfolio update, the Future Fund – set up to cover future superannuation liabilities of public servants – said global equity markets turned down sharply in the March quarter, due in part to higher interest rates around the world . Australia’s sovereign wealth fund suffered its largest quarterly loss in two years amid renewed geopolitical and monetary policy risks. At the same time, the fund reduced its cash holdings as allocation into Australian and developed market stocks and so-called alternative assets increased, the statement said. “In addition, the Russian invasion of Ukraine has added to risk for international investors,” said Peter Costello, the former Liberal treasurer and now chair of the Future Fund he created in 2006.
Australian software billionaire Mike Cannon-Brookes has made a dramatic $600 million market raid on Australia’s biggest coal generator and polluter AGL. At 11.28%, he is now AGL’s largest shareholder and he has vowed to oppose its proposed demerger and fast track its exit from coal. Cannon-Brookes said he expects AGL Energy‘s demerger to be voted down, in a move which would force the entire board of the power giant to quit. Grok Ventures, the private investment firm of Cannon-Brookes and his wife Annie, hired brokers to stand in the market late Monday to snap up his stake which may be enough to thwart the de-merger vote at the upcoming shareholder meeting in June. Cannon-Brookes said in a letter to the AGL board that Grok was now the biggest shareholder in AGL which has had few institutional backers because of its massive fossil fuel exposure, and declared there was a “better future” for the company.
Qantas says it will return to profitability in the next financial year as leisure and corporate travel markets roar back to life and begin to outstrip pre-pandemic passenger levels. The resurgence has paved the way for the airline to order a dozen new Airbus A350-1000 jets to commence non-stop 19-hour flights from Sydney to London and Sydney to New York by the end of 2025. Qantas has unveiled ultra-long-haul aircraft for non-stop flights from Sydney and Melbourne to London and New York, but experts have questioned the impact on emissions and mental health. Launching in late 2025, the $6bn plan involves new A350-1000 aircraft specially configured with extra premium seating and reduced overall capacity of up to 238 passengers The 20-hour trip from Sydney to London will be the world’s longest direct commercial flight, but the airline plans to charge additional fares in a bet that passengers will pay a premium to avoid a stopover Qantas claims the planes will be 25% more fuel-efficient than previous aircraft and will feature “wellbeing zones” for passengers to move about in the cabin. Experts said that while not having to take off and land for the stopover will save some fuel, this will be mostly offset by the weight of all the extra fuel needed for such long flights. They also cautioned that the negative effects of repeated long haul flying on crew members’ circadian rhythms would be more pronounced on the longer flights, and deep vein thrombosis risk would be elevated for passengers. The Transport Workers’ Union was critical of Qantas’s spending on new aircraft after thousands of employees lost their jobs during the pandemic.
Australian coffee lovers are not alone in facing sharply rising prices for a caffeine fix: across the northern hemisphere, from America to Britain to Japan, cafe patrons are already shelling out well over $5 for a flat white. In any part of the world where a flat white can be found, cafes are facing the same perfect storm as in Australia: soaring coffee bean prices, supply chain squeezes, staff shortages and rising energy bills. In London, the price of a good flat white has recently crossed the £3 mark. It’s getting pretty common to pay £3.20 ($5.70) for a takeaway, even more for a sit-in. In Tokyo and Paris, the price of a top drop can surpass $6.50. The raw data tells the story. In February, Britain’s retail price index for coffee and other hot drinks shot up 11.5% from a year earlier. In the US’ March consumer price index, the coffee price surge was 11.2%. Starbucks in the US raised its prices in October and in January, and CEO Kevin Johnson says they will rise again. In Britain, a Starbucks flat white, which is supposed to be the cheap end of the market, is £2.90 – about $5.20. Last month, the hugely popular Starbucks Japan put up its prices by between 10 yen and 55 yen (11¢ and 60¢), on coffees that typically cost about 300 yen (half the price of an upmarket Tokyo flat white). In Singapore, there is a two-track coffee culture: the local brew versus European. The European has always been more expensive and the famous Raffles Hotel has taken the price differential to new heights. A coffee in its sumptuous lobby bar will now set you back $S12 ($12.20).
The Morrison government gave $1.1 billion in personal protective equipment (PPE) contracts to Aspen Medical — which is now part of an international criminal probe into corruption and money laundering as ABC’s Four Corners reported. Aspen Medical actually had no experience in a deal this big — the deal was worth $500 million more than any other government supplier at the time. Interestingly, Health Minister Greg Hunt also penned a letter of recommendation for Aspen Medical when the deal was being made — but the letter was open-endedly addressed, with no date on it, leaving its use ultimately up to the company to decide. Former Health Department secretary Stephen Duckett called it “dangerous” and “extraordinarily unusual” for a minister to do so. Aspen Medical had a combined loss of $7 million in 2018-2019, but profits skyrocketed to $420 million in the last two years.
The number of gambling ads on television in Victoria has skyrocketed in the past five years, new data has shown. Young men between the ages of 18 and 24 were the biggest sports betters in Victoria A report from the Nielsen institute found gambling ads have increased by 253% since 2016. The research commissioned by the Victorian Responsible Gambling Foundation showed there were an average of 948 gambling ads broadcast daily on free-to-air TV in Victoria in 2021. The data showed the gambling industry spent $287.2 million on advertising in Australia last year, an increase of $15.9 million from 2020.
Transurban will not diversify into other transport modes such as railways or airports but is keen to expand its tollroad operations into associated businesses like road user charging, chief executive Scott Charlton has told investors. The company is eyeing opportunities to operate road user charging systems, including using “price charging signals” to manage traffic flows. It also wants to develop more apps and other services for drivers, particularly autonomous and connected cars that can communicate with infrastructure. Transurban is urging drivers to consider EVs (Mr Charlton already drives one) and is looking for 11 motorists in Victoria to document their experience trying them out on the state’s roads. It is calling for applications from motorists who want to test drive a Nissan LEAF for a week and receive a $1000 travel voucher in return for documenting their experience through videos and photographs as part of program to create “new advocates who can join us in championing EVs and encourage others to give them a go”. About 10% of the traffic on Transurban’s A25 tollroad in Montreal already consists of EVs.
ANZ Banking Group earned a $3.1 billion cash profit, up 4% year-on-year, for the first-half.
And that’s it for this week. And next week, I’ll be talking to Gustavo Quiroga, the Vice President & GM of Mobiquity for APAC. Mobiquity partners with the world’s leading brands and banks to design and deliver compelling digital products and services. And I’ll be talking to AMP Capital chief economist Shane Oliver about interest rate rises.
In the meantime you can catch me on Facebook, Twitter Instagram and 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.