Anthony Albanese, I have three surprises for you. One is manageable, the second is disturbing, and the third takes the nation into a “retrenchment prevalent” employment world we have not seen for many years.
Reserve Bank governor Michele Bullock will privately celebrate.
Our first surprise emanates from China, where the US clamps on Chinese exports are really starting to bite Chinese manufacturers. Australian buyers have been used to waiting for deliveries, and so ordered more than they might have otherwise done. Suddenly, all the orders arrived from China. That has caused greater stocks than normal, but the good news is that the Chinese are prepared to lower their prices.
In addition, an expected lower Chinese demand is also impacting oil prices. China is once again exporting deflation to Australia.
However, on the other side it also underlines the deep problems in our major trading partner which I discussed last week.
The second surprise is quite sudden. During December, January and February, those retailers that were targeting their marketing at the 70 per cent of Australians who are not affected by mortgage and rent stress were doing well.
Reflecting this, retail Seek job advertisements in January skyrocketed 9.6 per cent – the biggest rise of any industry sector.
As measured by ABS statistics, overall sales were weak, reflecting the sharp cutbacks from those suffering mortgage and rent stress and those on the fringe of suffering.
In addition, Victoria in February – leaving aside the Taylor Swift sugar hit – suffered a noticeable downturn, but other states in the prosperous end of the market were holding up. But since Swift, Victoria has fallen further and, as in past decades, when either NSW or Victoria suffer a downturn it impacts the rest of the country.
Accordingly, are now seeing a more serious nationwide retail situation. It is possible that the Swift phenomenon took a lot of spare cash out of the system, which triggered a greater intensity in the Victorian downturn.
In addition, Victoria has a bloated public service and has started retrenchments, which sends alarm bells around state government employees. Irrespective of the cause, the Victorian downturn has spread to other states.
As always, thanks to federal government subsidies and the iron ore boom, WA is prosperous and references to downturns do not apply to WA.
It is clear that even in the more prosperous families the constant rise in the cost of living, particularly as a result of state government charges and taxes, is taking a toll.
The federal government will try and minimise the increase with subsidies and tax cuts in the next budget.
Iron ore, coal and gas have boosted Federal government fortunes, but there is underlining world downward momentum which means that while budgetary pressures will help the cost of living in the short term, many of the subsidies will not be sustainable.
Our third surprise comes straight out of left field. If the sluggishness in sales continues in the final four months of the 2024 financial year there will be a downturn in profits because business costs continue to explode in Australia, led by labour costs and then extending into government services, energy, power, transport and building costs.
In the post Covid-19 years, we have seen a shortage of labour, and companies have recruited actively. All around Australia, enterprises are beginning to think about first cutting back hiring and then shedding labour.
Changing the employment market from one of active hiring to widespread retrenchments is a slow process but, almost always, a large organisation fires the starters gun.
In 2024, that organisation was the Commonwealth Bank. To have the country’s largest bank using artificial intelligence and other forces to justify retrenchment set alarm bills throughout the business community
The simple message – “If CommBank are going to do it, then we should too” – is fast becoming the catch cry around the nation. And that includes starting to look at how to use AI to become more efficient.
In an incredible piece of bad policy timing, the government has thrust onto business without consultation a 750-page blueprint for employment in Australia – under the tag of “loopholes” in employment rules.
The act will make employing people more expensive and less productive, and given the downturn it will cause chief executives and boards around the country to look at what cost savings they will have to introduce to adapt to this new environment.
Of course, down at Martin Place at the RBA, this sentiment change is exactly what they wanted to happen. If what I am seeing is played out, then we will have sizeable interest rate cuts later this year.
But it will take a considerable time for the change in labour momentum to be reflected in the statistics that the Martin Place bank uses to determine interest rates. My guess is that the first signs will come in a fall in job advertisements.
In past downturns, the RBA has waited too long before changing policy settings because the Martin Place bunker waited for the statistics to hit their desk instead of getting out into the business community around the land and discovering what is really happening.
But to confirm the looming lower interest rate trends, yields on long term corporate bonds have started to fall.
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