Spotlight Australia: Heading for ‘Mother of All Hard Landings’

There have been people, amongst them Prof, Steve Keen, who have warned about the implosion of the Australian bubble.

Of course on the other side of the Tasman, there are those that will argue that our much weaker NZ economy is somehow miraculously unaffected by all this - 'she'll be right mate'.

She damn-well won't be alright!

Spotlight Australia: Collapse in Service Sector; Unrelenting Discount Wars; Catastrophic Decline in Profits; Stranded Merchandise in Warehouses

Australia in in grim shape. Retailers are going under, home prices are sinking, and there is an enormous collapse in the entire service sector

Mish's Global Economic Analysis,

4 May, 2012

Collapse in Service Sector

Markit reports Australia Services Sector Slumps in April

KEY FINDINGS

The latest seasonally adjusted Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) slumped by 7.4 points to 39.6 in April (readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decline). This was the lowest monthly reading since March 2009.

The sharp fall in the Australian PSI® was driven by declines in the sales and new orders components of the index, which are now both at their lowest levels in almost three years.

Reports of weak trading conditions were widespread across all services sub-sectors and all states.

Consistent with these reports and with the latest weakening in Australian inflation (with headline inflation just 1.6% p.a. in the March quarter), the input prices and average wages and selling prices indices are now back at or below the levels seen during the Global Financial Crisis.

The sharp fall in the Australian PSI® was driven by especially large declines in the activity indices of the finance & insurance, personal & recreational services and health & community services sub-sectors.

NEW ORDERS

On a seasonally adjusted basis, new orders contracted further in April.

The new orders sub-index fell by 11.9 points to 35.8, which is similar to the levels seen following the Global Financial Crisis in 2009.

On a non-seasonally adjusted basis, new orders declined across all service sub-sectors in April, with particularly sharp declines reported in the health & community services and personal & recreational services sub-sectors.

Price Squeeze

Check out the enormous margin squeeze on Australian service sector businesses.

Input prices have risen for 110 consecutive months and wages have risen for 33 consecutive months, but sales, new orders, and selling prices have collapsed.

Catastrophic Decline in Profit

The Age reports Retailers hit fast-forward in a race to the bottom

THE unrelenting and deep discounting war being fought in the retail sector has notched up its second victim in a week, with Harvey Norman revealing its pre-tax profit slumped 44 per cent in the March quarter.

Sales for the first nine months of this financial year have fallen nearly 7 per cent.

Only last week, rival electronics and entertainment retailer JB Hi-Fi - which released its own disappointing sales and profit forecast due to the double punch of price deflation and price competition - named Harvey Norman as one of the main culprits of the race to the bottom.

Yesterday, Harvey Norman said the technology category continued to be challenged by declining average selling prices, with global sales falling 6.7 per cent to $4.39 billion for the nine months to March 31.

Comparable-store sales, which take out the contribution of new stores, slipped 6.6 per cent.

Australia, the company's key region, led the decline, and showed a worsening trend through the nine months. First-quarter sales were down 2.9 per cent, but that accelerated to a 10.2 per cent fall in the second quarter, and sales in the third quarter were down 9.2 per cent.

Third-quarter, like-for-like sales were down 7.9 per cent in New Zealand, 5 per cent weaker in Slovenia-Croatia and 1.3 per cent stronger in Ireland.

The knock-on effect to pre-tax profit has been catastrophic.

Stranded Merchandise in Warehouses

Please consider Freight firm fails at cost of 1000 jobs

RETAILERS and building suppliers across the country have been left with large amounts of stock stranded in the warehouses of collapsed transport firm 1st Fleet.

The express freight and warehousing company yesterday sacked its entire workforce, of 600 permanent employees and 400 sub-contractors.

It collapsed with debts worth tens of millions of dollars, triggered by the withdrawal of its lead banker, Coface, from its Australian portfolio.

Near midnight on Tuesday, night-shift workers at company depots were confronted by the firm's administrators and security guards, who locked them out and changed the locks. In Melbourne, most found out they no longer had a job when they turned up for the 7am shift.

Neil Chambers from the Victorian Transport Association said the economic climate for transport and logistics companies was as bad as during the 2008 financial crisis. "1st Fleet is almost like the tip of the iceberg," he said, with wafer-thin margins sending small transport firms to the wall.

RBA downgrades Australian Growth Forecasts, More Rate Cuts Likely

The Australian reports RBA downgrades Australian growth forecasts, more rate cuts likely

THE Reserve Bank of Australia dramatically downgraded its growth forecasts for the Australian economy, sparking the prospect that more interest rate cuts could be ordered in the next few months.

In its quarterly Statement of Monetary Policy, the RBA said that the domestic economy would now grow by just 2.75 per cent by June, down from its forecast of 3.5 per cent delivered just three months ago.

The economy is then predicted to bounce back slightly to 3 per cent by the end of 2012.

The RBA has also softened its inflation forecasts, which economists predict will likely bring on more interest rate cuts.

Not Dramatic Enough

I have no idea what the RBA is smoking but "growth" is not in the picture, nor is a year-end bounce.

Does the RBA even believe what they are saying? If they did, they would not have cut by a half, surprising nearly every economist in the country.

Alternatively, they are monetarist clowns who actually believe they can fine tune the economy with monetary policy even though the enormous property bubble proves otherwise.

Australia in Recession

Australia is now in recession and it will be a long, harsh one, no matter what the RBA does or doesn't do. Retail prices are too high, wages are too high, real estate prices are too high, and belief in policy makers is too high.

Many Australians have been emailing me for years that Australia is recession proof., that housing is in short supply and Chinese exports will keep the economy humming.

Reality is about to set in big, big-time.

Australia Heading for ‘Mother of All Hard Landings’: Pros

Australia is headed for the “mother of all hard landings,” according to Société Générale strategist Albert Edwards, who says the country’s “credit bubble” could burst if China’s economy suffers a sharp slowdown.

CNBC,

4 May, 2012

“(In Australia) We see a credit bubble built on a commodity bull market based on a much bigger Chinese credit bubble,” Edwards said in a report. “Of all the bubbles I have seen over the last 30 years in this industry, this one is even more obvious.”

Edwards reiterated his case for a hard landing for the mainland economy, pointing to the official Purchasing Mangers Index (PMI) of 53.3 last month, which he says is “the worst” April reading in years.

“We are likely to see the PMI trend lower from here and the case for further Australian dollar weakness is clear,” he said.

The health of Australia’s economy, which is largely driven by its resources sector, is closely tied to that of its largest export market China – the world’s biggest consumer of commodities such as iron ore, copper and aluminum.

The Reserve Bank of Australia on Friday separately lowered its growth forecast for 2012 to 3 percent from 3.5 percent. It also lowered its outlook for export growth, warning that a sharp escalation in Europe's crisis could have significant implications on Asian demand, which in turn would weigh on commodities prices.

Australia Has an ‘Obvious’ Credit Bubble

According to Edwards, the lack of volatility in the Australian economic cycle and the absence of any recession since 1991 has led Australians to have an “excessive” appetite for debt in the belief the “future will reflect the past”.

“But for us, suppressed volatility is merely storing up an even bigger crash further down the road,” he wrote in report published Thursday.

Paul Gambles, Managing Partner at independent financial consultancy MBMG, agrees that there is a large credit bubble in Australia’s banking sector, and a hard landing in China is going to be the catalyst that “pricks” the bubble.

Companies in the resources sector, which borrow large amounts to fund their projects, will struggle to repay their debt if commodity prices fall, he said.

“Commodities tend to be capital intensive and based on a long term business model. There has been a huge amount of additional investment in commodities sector since 2008 on the assumption that higher commodity prices would be sustainable,” Gambles said.

“Any reduction in commodity prices is going to devastate these companies…it doesn’t take a big change in commodity price or demand to destroy the viability of new projects,” he added.

He also points to the massive level of household debt in the country, which has been around 150 percent of disposable income since 2006, according to the Reserve Bank of Australia.

“Australia has a very leveraged consumer sector whose wealth is dependent on the performance of the housing sector, which I think is also in a bubble,” he said, adding that the real estate market is highly overvalued, by approximately 45-70 percent.

“Consumer debt, and debt from the resources sector is way beyond anything the Australian government is going to be able to manage if there is a recession or downturn,” Gambles said.

Short the Aussie

Like Edwards, Gambles says that the case for a weaker Australian dollar is clear, warning that the currency will fall below parity against the greenback to 70 cents over the longer-term.

“We think that the Australian dollar along with perhaps the Aussie banks and Aussie property are maybe the greatest shorting opportunity that we're going to see for a long time to come,” Gambles said.

While he doesn’t think the sharp fall in the Aussie is imminent because of the healthy margin it offers carry traders, further deterioration in the outlook for the economy could “terrify” investors and lead them to exit the trade.

“The 70s is not a floor for the Australian dollar. When the Aussie spirals it can be a very volatile currency,” he said. The last time the currency fell below the 70 U.S. cent level was in October 2008 during the global financial crisis.

RBA cuts growth outlook as economy softens

The Reserve Bank of Australia has cut its growth and inflation forecasts as non-mining sectors struggle under the weight of a high Australian dollar.

ABC,

4 May, 2012

In forecasting marginally lower growth rate of 3 per cent for 2012 and 2013, the RBA has signalled that earlier predictions were overly optimistic.

The central bank's latest quarterly statement on monetary policy comes three days after it cut the official cash rate by 50 basis points because of lower inflation and the need to stimulate parts of the economy.

"Although three months ago a range of indicators were suggesting that economic growth was close to trend, the outcome for 2011 as now reported was, in fact, somewhat weaker than that," the statement said.

In the previous statement, issued in February, the economy had been forecast to grow at 3 to 3.5 per cent.

Federal Treasurer Wayne Swan says the statement indicates Australia's economy is strong, and he remains committed to delivering a budget surplus next week.

"We've got contained inflation, we've got solid growth, we've got growth around trend, and we've got record levels of mining investment," Mr Swan said.

"Now this is in stark contrast, as the Reserve Bank points out, to conditions in most other developed economies."

The Reserve Bank expects employment growth to "remain subdued" in the near term and has cited the high Australian dollar as a key pressure.

"There is the possibility that in the near term, labour shedding across a range of industries outside of the mining sector accelerates as firms continue to adjust to the high exchange rate, weaknesses in the property market and the effects of weaker public demand."

And as the dollar bites, Prime Minister Julia Gillard has announced plans to hold an economic forum in June to discuss the economic impact of the strong currency.

Ms Gillard says the forum will include representatives from business, unions, community organisations and state governments.

The Reserve Bank also pointed to a subdued housing market and says "a recovery in housing construction is unlikely in the near term".

"What remains is for buyers to reach a point where they have sufficient confidence to commit to contracts for construction of new dwellings and for the supply side of the housing market to be responsive to demand," the RBA said.

The RBA says those conditions are needed to underpin a sound recovery in construction.

The central bank has also revised its inflation outlook to 2.5 to 3.5 per cent in the next year, with underlying inflation down to just 2 per cent from its previous forecast of 2.5 per cent, while noting the sharp fall in CPI inflation to 1.6 per cent.

The RBA expects the introduction of the carbon price in July to boost headline inflation by 0.7 percentage points in the year to July 2013.

"A key assumption made here is that there are no second-round effects owing to higher margins or wage claims," the statement says.

Backing the banks

The RBA has also confirmed claims by commercial banks that funding costs remain high.

"They remain higher than in mid-2011. At the same time, elevated competitive pressures have kept deposit rates in Australia high relative to the cash rate."

The RBA says a significant external risk to its outlook is the chance that the sovereign debt crisis in Europe could intensify and derail the global economic recovery.

"A substantial deterioration of conditions in Europe would be likely to have flow-on effects to the rest of the world," the statement said.

"A major flight from risk in global capital markets would see a marked deterioration in credit conditions and confidence."

The Reserve Bank holds its next board meeting on June 5, and some economists are tipping a further reduction in the cash rate to 3.50 per cent.