It’s not my nature to be pessimistic, but if I let what I’m seeing now dominate my thinking, I could easily give in to the media preoccupation of playing up the negative stories prevailing at the moment. And so I will look to the future and try to unearth reasons to be positive.
To set the scene, national iconic retailer Gerry Harvey recently revealed October and November were disappointing trading months for retail but he’s hopeful of a good Christmas period, provided it’s hot! So retail is in the lap of the weather gods.
By the way, he predicts with the expected tight conditions for retail in the first half of 2013, there will be a wave of bankruptcies in his sector where he “could be the last man standing!”
It’s possible Gerry’s crystal ball is wrong and that interest rate cuts will actually help the worrying situation, but this could be over-estimating the value of rate cuts and under-estimating the fear of consumers, who have bumped up their saving levels to historical highs.
We also could be undervaluing the impact of the creeping, growing cyber world which, while not huge now, is whipping away cream from retail operations just when they need it to sweeten pretty sour trading conditions.
Making matters worse, the high dollar is making travel more appealing and the cheaper products accessible overseas. Meanwhile at a local level, the dollar encourages internet purchases, especially when local sales under $1000 attract a GST unlike their foreign rival products.
End of the two-speed economy
From a whole of economy viewpoint, this sorry state for retail was tolerable while the mining sector was booming, creating a so-called two-speed economy, but as the boom slows down, there’s now a greater reliance on other sectors such as retail, housing, manufacturing and services to bolster economic growth.
That’s where the Reserve Bank (RBA) and the dollar have key roles to play, with Treasury cutting down its 3.25% predicted growth number for 2012-13 to 3% while the RBA has cut its 2013 forecast from 3.75% to 3%.
Economic consultancy Macroeconomics thinks the financial year growth rate will be more like 2.6% and this is consistent with what Gerry is guessing for the economy.
Lower dollar needed
Right now the economy needs a lower dollar and rate cuts could help there. Unfortunately, however, we have become such a popular place along with our currency for central banks and investors, it’s driving up the currency just when the slowing mining boom should be bringing down the dollar. There is mounting pressure on the RBA to cut in December and then early next year.
By the way, the Federal Government’s drive for a budget surplus is, according to the RBA, likely to take 0.75-1.5% off economic growth this financial year, which means the economy really needs rate cuts like never before.
So, let’s look at what’s happening now to build a case for a December cut or not. Try these:
• A record 72% of businesses say they don’t want finance.
• Total new lending commitments were up in September (4.8%) but down 7% in the previous two months and are down 1.8% on a year ago.
• Housing loans are up 4.4% for the year.
• Commercial loans are down 6.2% for the year but the September reading was up 6.9% after falling 4.7% in August.
• The NAB business confidence index fell from minus 0.3 points to minus 1.3 points in October.
• Business conditions fell from minus 3.3 points to a 41-month low of minus 4.8 points.
• ASIC says insolvency appointments were up 10% in the September quarter on the previous quarter, with all states and territories, except for the ACT, experiencing a rise in insolvency appointments.
• The November Veda survey found an increase of 11% in bankruptcies and external administration and customer payments had deteriorated during the past six months for 53% of the businesses surveyed.
• Optimism levels for corporate chief financial officers, according to a Deloitte survey, remain subdued for 54% of CFOs, who were mainly concerned about global factors such as the slowdown in China and European sovereign debt issues. Local issues included uncertainty over federal government policy, commodity prices and the price of the Australian dollar.
• On the plus side, the Westpac consumer sentiment reading for November rose 5.2% to 104.3 and could show rate cuts are starting to work. This has been in negative territory for 14 of the past 16 months!
Optimistic end to the year
It’s possible that the worst is behind us with China’s outlook on the mend, Europe managing to sort out recent difficulties for Spain as well as Greece and the US economy is definitely growing stronger, though it does have the fiscal cliff to deal with.
Fortunately, credit data watcher, Veda, has read the tea leaves and has an optimistic take on the year ahead.
"The outlook for 2013 is looking better, with credit criteria appearing to loosen within the next six months, credit applications increasing and a decline in the gloom around economic conditions having a negative impact on their organizations,” said Moses Samaha, Head of Commercial Credit & Procurement Risk.
The latest report showed business sentiment was with economic conditions having a negative impact on 59% of businesses compared to 74% in 2011. Credit applications were up 32% though lending now has stricter criteria.
Rate cuts needed
However, customer payments have deteriorated in the last six months for 53% of participants, which clearly shows it would be naïve to believe the economy is going gangbusters. Clearly the RBA’s work has not been done and a rate cut in December is absolutely essential if we want to see unemployment contained. Remember unemployment is 5.4% but 18 months ago it was 4.9% and so some 60,000 people have lost their jobs over that time.
In the absence of a falling dollar and with the Government shooting for a budget surplus that will slow the economy down adding to unemployment, more rate cuts are needed. Glenn Stevens, come on down and save some workers’ jobs and restore some business confidence.
This would be the best way to prove Gerry wrong.Peter Switzer is the founder of the Switzer Super Report, a newsletter and website for self-managed super funds. www.switzersuperreport.com.au