Nassim Khadem Reporter

Nassim covers the accounting and tax rounds for BRW, as well as general business news. She previously worked for The Age newspaper covering general news, state politics and economics.

View more articles from Nassim Khadem

Recovery 2013: What are you waiting for?

Published 24 January 2013 01:28, Updated 27 January 2013 17:20

+font -font print
Recovery 2013: What are you waiting for?

This year Australia might achieve the remarkable feat of being the only rich country to have gone 22 years without a recession.

Less than four weeks into 2013, there’s clear signs the that economy – both globally and locally – is gaining momentum.

The fiscal cliff drama in the United States is resolved, even if many are dissatisfied with the outcome. The S&P 500 index touched 5½-year highs and Chinese economists have forecast that their nation will achieve growth of 8 per cent to 8.5 per cent this year.

Meanwhile in Australia, the sharemarket’s strong run continues. The car market is posting record sales and the number of approvals to build new homes is higher than the five-year average. Miners are also more confident about the year ahead, with the global iron ore price topping $US150 a tonne and recovering 72 per cent since September, thanks in part to China’s improved growth prospects.

No one can deny many sectors of the economy are still fighting their way out of the slow lane but this trickle of good economic news gives business leaders reason to be more confident.

“While we’re planning for 2013 to be as tough as 2012, we are seeing more positive signs in terms of peoples’ preparedness to put on new staff,” the chief executive of recruitment agency Talent2, Geoff Morgan, says. “You can only exist in a cost-cutting environment for so long. Sooner or later you have to take a positive approach and start to look for growth and development.”

But Australian CEOs are only gradually shifting their moods. As recent business confidence surveys confirm, much of the business world remains gloomy and in some cases, outright petrified. In December, National Australia Bank’s monthly business survey showed business confidence slumped to its lowest level since April 2009, when our nation was still fighting off the scary effects of the global financial crisis.

Those who steer the economy using the interest-rate levers find it hard to understand the pessimism. In a speech in June, Reserve Bank Governor Glenn Stevens noted the “unrelentingly gloomy” nature of public discussion and how Australians are “grimly determined to see our glass as half empty”.

Deloitte Access Economics director Chris Richardson believes the pessimism is a result of our past success – Australians have become too used to exceptionally good times and find it hard to cope with the bad.

“We’ve been out the front of the pack for so long that tough times have taken more of a toll,” he says.

Comparative to previous boom years, businesses, especially those in retail, manufacturing and tourism, had a hard year in 2012. Even the miners, which had enjoyed unparalleled growth for years, halted investment as commodity prices eased.

There are also bigger issues threatening Australia’s long-term economic health: What to do about lagging productivity? How to deliver meaningful taxation reform? How to position Australia as a leader in the Asian century? And there are unfamiliar challenges, including new global entrants, energy constraints, climate change and political instability.

However, Australia, unlike most, has a sound base from which to work. When many Western economies are grappling with high unemployment and no growth, Australia, as Treasurer Wayne Swan repeatedly points out, is from most view points, a stand-out economy.

While the Reserve Bank of Australia predicts slightly lower GDP growth of 2.75 per cent for the first half this year (according to its November statement of monetary policy), the IMF puts our growth at 3 per cent. Unemployment sits at 5.4 per cent (as of December 2012) and interest rates are at four-year lows. And economic predictions aside, there’s much else to be upbeat about:

Asia on the rise

Perhaps the biggest long-term positive for Australia is capitalising on Asia’s growth. The Asian Century white paper, released last year, predicts that trade links with Asia will be at least one-third of GDP, up from one-quarter today.

“The China story has still got a long way to go,” CommSec chief economist Craig James says. “You’ve got 1.3 billion going down the path of industrialisation – it’s something that people still can’t understand the enormity of. With the Chinese growing their wealth, buying more cars and washing machines, Australia is in the driving seat. We’re providing resources for China to grow.”

It’s not just coal and iron ore the Chinese are buying. Agricultural commodities, education services and tourism will all be in big demand.

Tourism is already one of Australia’s largest export industries and according to the Australian Bureau of Statistics was worth about $24 billion in 2010-11, with seven of Australia’s top 10 most valuable in-bound tourism markets from Asia. By 2020, Asia’s share of inbound arrivals is expected to have increased from 41 per cent to 45 per cent, the white paper says, driving the total economic value of in-bound tourism to about $35 billion.

There are also more chances for Australians to export related products and services. Australian wine is becoming a hot commodity in China. Australian shiraz and cabernet sauvignon, or blends involving these varieties, comprise 77 per cent of exports to China.

“Already it is our most valuable export market for bottled wine above $10 and tops the list in every single price category above this,” says wine commentator Jeremy Oliver, who has spent much of the past year trying to educate the Chinese about Australian wines, as well as build up networks in China.

Wine Australia figures show that last year exports to China increased by 7 per cent, to 44 million litres, against a small lift in overall wine exports of 3 per cent to 721 million litres (total wine exports valued at $1.85 billion).

Big corporations, including Rio Tinto, ANZ, BHP Billiton, Rheem and BlueScope Steel have long-held strong links with Asia, but now smaller players are realising Asia’s potential.

Oliver wants to create a “hub” that connects high-end Chinese customers with Australian wine producers and companies. He’s targeting the “younger” Chinese wine consumers with educational activity on behalf of Australian wine producers, including Jacob’s Creek and Brown Brothers.

Former Austrade economist Tim Harcourt, who is now with the Australian Business School at the University of NSW, says he’s seeing more and more small companies get in on the action in Asia. “SMEs are joining global supply chains, engaging in strategic alliances and joint ventures and setting up franchises,” he says.

But 2013 won’t be so much about doing business with Beijing and Shanghai. It’s about going outside to other areas such as Chengdu in western China as well as expanding more broadly across Asia.

“Western China needs roads, airports, civic buildings and schools – so there’s plenty of opportunity for Australian architects, designers, construction companies and anyone with skills to build western China’s physical and social infrastructure,” he says.

Aside from China, Indonesia is the “big sleeper”, Harcourt says. “ANZ has expanded from two to 28 retail branches in Indonesia, where the rates of return [on investment] are very high, at 30 per cent or more.”

Then there are areas such as the education sector, which is set to benefit from Asia’s rising middle class if it can provide first-class and cost effective services.

The white paper notes that the number of students from Asia, particularly from China, India and ASEAN members, studying in Australia increased from about 170,000 in 2002 to more than 320,000 in 2011, contributing 79 per cent of the export income generated by international students studying in Australia.

Western Union Business Solutions, which allows companies to send and receive cross-border payments and manage foreign exchange, recently joined up with ChinaPay to allow higher education institutions around the world to accept international tuition and student fees in Chinese yuan.

Western Union Business Solutions general manager Simon Glendenning says educational transactions are soaring, with more than 400 universities in the United States, Canada, the United Kingdom and Australia using the service to process their outbound vendor payments and inbound student tuition and fees.

The mining sector is also deeply ingrained in the China love story, even if it did have a rocky year in 2012. In a speech in Brisbane in October, BHP Billiton chief executive Marius Kloppers said that while commodity prices over the coming decade wouldn’t reach the record highs of 2002, “what we can instead expect is demand growth at more predictable and sustainable levels and more moderated pricing”.

The resources sector will also continue to support growth elsewhere in the economy, including construction, manufacturing and services.

The mining technology services and equipment sector has increased its exports rapidly over the past decade, the Asian Century white paper says, from about $470 million in 1996 to about $2.5 billion in 2009, from total revenue of about $8.7 billion. Again, this is largely thanks to Asia – exports to Asia make up the largest share and exports to India and Indonesia now exceed those to China.

Spending to increase

Perhaps the biggest beneficial economic impact will come from falling interest rates. If standard variable mortgage rates hit 6 per cent in the first half of 2013 – as some economists are predicting – that will mean that someone with a $300,000 mortgage will have about $4500 less interest to pay a year compared with what they were paying in November 2011.

While households won’t spend it all, they will spend some of it – at the shops, on a new car, or new housing investments. That’s why sectors largely driven by interest rates – retail and construction – are expecting a better year in 2013.

“Most of the industry players I speak to would describe the past few years as a cyclical downturn and that this year things should start to move up,” says Melbourne property developer Ashley Williams. He heads Evolve Development, backed by Melbourne businessman Ron Walker, and made it to the BRW Rich 200 last year with personal wealth of $215 million.

“By February-March, we will start to see auction clearance rates pick up a bit – that’s usually the first sign that the market’s got its legs back,” he says. “We will see a resurgence in middle-city suburbs and that will flow through to the outer ring.”

High hopes for coal prices

Queensland property tycoon Kevin Seymour is also upbeat about his state’s prospects, although for him it’s more closely linked to a better outlook for mining rather than property. The man who built a $585 million fortune (last year’s BRW Rich 200 valuation) through a diverse range of investments, including Tatts Group shares, recently increased his mining interests, including joint venture last year with the world’s richest woman, Gina Rinehart, on a coal project between the town of Alpha and Abbot Point in central Queensland. Seymour predicts coal prices will rebound in line with iron ore prices, which, in turn, will reinvigorate interest in mining investments and projects that had been put on hold. “Iron ore and coal prices are closely linked so one can assume that coal will bounce back,” he says.

But in his view a wider economic resurgence is dependent on how low official interest rates fall. Seymour believes the Reserve Bank of Australia needs to worry less about inflation and instead aggressively cut the cash rate to 2 per cent to revive the economy.

“We are still a lucky country but what we need to generate is interest and investment,” he says.

“Everyone is battening down the hatches in case things get worse. We need to kick-start the economy. A bit of inflation is good for that.”

Wealth growing

While consumer spending has been subdued, savings have increased, with Australian Bureau of Statistics data showing that real net national disposable income grew to $49,100 per person from $38,500 during the decade 2000-01 to 2010-11.

The OECD notes how Australia’s per-capita income was 10 per cent above the average level of the top half of OECD countries by 2010 and only 5 per cent below the US level.

The recent strength of the sharemarket has also helped increase personal fortunes. ABS data for the September quarter shows net household financial wealth climbed 18.4 per cent in the past year and 85.5 per cent over the past decade, to $69,422 a person.

Per household wealth is at its highest since the global financial crisis in mid-2008 and stands at a record $1.58 trillion. What’s more remarkable is that cash and deposit holdings represented 23 per cent of assets, with a record $748.6 billion in cash and deposits at the end of September.

The household savings ratio, at 10.6 per cent, is among the highest in the OECD, AMP Capital chief economist Shane Oliver says. “This provides a strong buffer for Australian households and indicates we are a long way from the debt-driven growth of last decade.”

Election benefits

As well as looking to economic positives, Australians want greater political certainty.

CommSec chief economist Craig James says the one complaint he hears constantly from business is a perceived lack of political leadership by both state and federal governments.

“The government’s lost standing in the community but so has the Opposition and the Greens,” he says. “All political parties are on the nose. Many businesses and consumers are waiting for the election to come ... that provides much optimism.”

Coffee entrepreneur and BRW Young Rich member Phillip Di Bella is another who is optimistic about the impact an election will have on confidence. Di Bella, who is among the Queensland business heavyweights who stays in touch with previous and current party leaders, including Kevin Rudd, Malcolm Turnbull and Tony Abbott, says he hopes whoever wins federally will deliver business more certainty.

Digital opportunity

The other cause for optimism is the new opportunities to gain customers and market-share via new technology and the digital space. We are moving into a world where the winners will be those who are closest to customers. So 2013 is the year for companies to put digital plans into action if they haven’t already, says Adobe Australia and New Zealand managing director Paul Robson.

A recent study of 295 senior marketers operating in Asia-Pacific, including companies such as Toyota, 20th Century Fox, Tupperware and Citi Group, confirmed this. It showed that Australia invests more in digital marketing than any other country in Asia-Pacific, with 41 per cent of Australian companies spending 25 per cent or more of their budgets on digital marketing.

“I genuinely think 2013 is the tipping point,” Robson says. “When companies like Fairfax [publisher of BRW] throw out 60-year-old technology to move to a digital platform – that’s a big deal. CBA is now completely mobile first – it delivers content to tablets and iPhones.

“So we are starting to see big decisions made by big companies that transform the marketplace.”

Confidence to spend

New technology, including social media, means we’re constantly being alerted to news from around the world. In a new book from The Economist called Managing in Uncertain Times, the executive vice-president and chief financial officer of Ford, Lewis Booth, used the example of the 2011 earthquake in Japan, which affected a very small number of suppliers, but because they supplied global manufacturers, the earthquake’s impact was felt around the world.

CommSec’s James says that domestically, the biggest risk business owners and investors face is sitting on their hands.

“The risk is that we talk ourselves into a slowdown when we don’t need to,” he says. “We may be our own worst enemies. That’s something that we have to get over – we have the confidence to invest, employ and spend.”

Comments