Signs of slowdown as dream run draws to an end Paul Cleary From: The Australian August 14, 2010 12:00AM
THE Australian economy is cooling to the point where rates may stay where they are or even come down.
The big spend is over and the cost of credit and its scarcity are biting hard.
Growth is also being choked by a raft of state and federal government imposts, especially when it comes to property development. The economy at the local level is proving to be far more challenging than pulling a set of macroeconomic levers.
Out in tradie land, the men and their utes are feeling the squeeze and their wives are hitting the phones to cold call and drum up business. Over the past week this reporter's home received a series of cold calls from the desperate wives of tradies looking for work.
As the benefit of government largesse finally fades, the Australian economy's dream run is coming to an end. At the very least it may be starting an extended pause, just as the risk of a double-dip recession in the US looms large.
But this may not be the end of the world, at least for Australia. A modest slowdown would take the pressure off interest rates, and it might also stem resurgent demands for higher wages.
It might even serve to remind people of the value of economic growth, just as wealthy capitalists like Dick Smith try to convince us that it is an evil.
This week a number of chief executives warned that the local economy was fragile and consumer spending remained weak.
Telstra and Myer, both touchstones of consumer spending, reported weaker than expected results. While Telstra has its own particular problems, Myer blamed its weak sales on a nervous pullback in spending by its well-to-do customers.
Coca-Cola Amatil, which reported a lift in first-half profit, warned that spending in the "mortgage belt" was a concern.
Retail spending across the board has softened under the weight of higher mortgage repayments, showing the impact of rates on what CCA chief excutive Terry Davis called "discretionary spending".
In recent months, key indicators of current and forward economic activity have started to turn down. Annual growth in retail turnover has slipped from around 4 per cent last year to almost zero at present. Despite continued high immigration, building approvals have turned down sharply in recent months.
The rise in unemployment, by 0.2 percentage points to 5.3 per cent, looks to be a turning point. Most worrying of all is the sudden rise in the workforce participation rate, by 0.2 points to 65.5 per cent, as more people flood into the job market in search of work.
Chartered accountant Sid Sassine, whose firm specialises in the construction and property sectors, among others, says his clients are facing difficulties ranging from tighter lending by the banks to a raft of government taxes and regulations that are inhibiting development.
Sassine says the economy has been "deceivingly soft", especially for sectors like small business that have not directly benefited from government stimulus. And now that the stimulus is being withdrawn, small businesses are having a very hard time.
The biggest factor of all is the move by lenders to tighten availability of credit, both by charging a high margin and by imposing more stringent requirements on existing facilities. Banks have been revaluing properties and forcing borrowers to find more equity, thereby forcing them to scramble to raise cash.
Sassine cites the case of a client with an excellent credit record who has been forced to find more equity after the bank downgraded the value of its major property. Developers are finding that banks are marking down the value of unsold property on their books.
Line fees charged by banks have risen from around 0.8 per cent before the GFC to more than 2 percentage points at present.
"The banks still constantly use the excuse that the cost of raising capital is expensive. How could this be, given the recent record profits reported?" Sassine asks.
Banks are not only charging more, they are also tightening availability of credit, which could trigger a wave of small business failures.
"What you hear out there is that banks are not open to small business. I have had immense issues and problems in getting finance for clients. The bigger banks are charging through the nose," he says. "Banks are charging more and making borrowers jump through hoops."
Commonwealth Bank's massive result reported this week confirms this analysis, especially the revelation that its interest margin had increased five basis points to 213 points.
But the bank signalled that it might raise rates further because of higher funding costs, even should the RBA keep rates on hold. CBA chief executive Ralph Norris said the bank's cost of funding could rise by an average 40 basis points in the next year.
Sassine says it is a relief that in recent months one of the majors has emerged as an aggressive competitor in the market.
The difficulties in the credit market are likely to prompt the Reserve Bank to keep rates on hold for some time and may even lead to rate cuts.
In its latest monetary policy statement, the RBA pointed to the withdrawal of economic stimulus as one of the factors that might continue to weigh on growth.
"Some rebalancing of growth is expected, with public investment likely to decline as stimulus projects are completed, while private demand is expected to strengthen," it said. The bank's economists expect investment to remain buoyant, largely thanks to the resources sector.
Subdued wages growth has been a factor underpinning the growth of employment in 2009 and into this year, the bank notes, with private sector wages growing at just 2.6 per cent over the past year. But this could all change after a federal minimum wage decision backing a hefty 4.8 per cent increase from July 1. This is now starting to bite and could explain the recent weakness in full-time employment.
Sassine warns that federal and state government tax changes, which have gone largely unnoticed, are tightening the screws on the property sector especially. This is why there is so little residential development under way at present, especially in places like NSW.
The Australian Taxation Office is adding to the pressure. In February, it issued a ruling that seeks to impose GST when syndicates buy property and then divide up units after the acquisition. Sassine warns this will restrict joint venture arrangements.
Poor handling of the government takeover of home warranty insurance is a key factor stifling development, he argues. The government took over the scheme on July 1 but the administration has been patchy, leaving many developers and builders in the lurch.
To make matters worse, the NSW government imposed a Torrens Assurance Levy, which adds $1000 to a $1 million property, on top of the existing $40,490 stamp duty, while the cost for a $4 million property is an extra $8500. These are extra costs that are ultimately borne by the developer.
Desperate governments and profit-hungry banks grabbing cash at a fragile period could inflict untold damage on the national economy.
