The week following Australia Day is shaping up to be a make or break moment for the nation’s Covid-19 recovery, with businesses across the country caught off guard by the double-blow of labour shortages and a slump in spending.
That’s the view of National Australia Bank, which as the nation’s biggest lender to small and mid-sized businesses has the best insight into the health of middle Australia. And right now it sees the summer’s Omicron spread testing many business owners like nothing else.
“We weren’t expecting this – what we’re seeing right now is both on the demand and supply side,” says NAB’s head of business banking Andrew Irvine.
“We were all hoping for clear skies in 2022, after a very difficult couple of years. It’s very weary for businesses and just mentally taxing for owners and staff”.
Business – particularly retail – is coming under extreme pressure from staff shortages, with workers being forced to isolate for seven days after contracting Covid or being a close contact. At the same time spending has fallen away as wary customers stay clear of crowded areas like shopping malls.
New figures from NAB, prepared for The Australian, show retail spending across the merchant terminals is down 5 per cent so far in the first two weeks of January, with areas such as dining out and tourism-linked spending hardest hit. Restaurant spending is down 9 per cent compared to the same time last year.
This mirrors separate figures from Commonwealth Bank, also released on Tuesday, which show total credit card spending over the past three weeks is down 3 per cent. The CBA credit card figures take into account online spending.
Elsewhere worrying signs have emerged from ANZ and Roy Morgan’s weekly consumer confidence survey, which shows that confidence tracking at its lowest January level since the 1990s recession. Confidence figures are a barometer for future spending intentions.
It’s a sharp contrast to the massive tailwind the Australian economy had heading into December, with consumers in the locked-down states of NSW and Victoria launching into a bout of catch-up spending.
Retail major Wesfarmers, which oversees Bunnings, Kmart and Target, in recent days said that retail trading conditions trailed off in the last weeks of December and customer numbers were down across its stores during the first half of January. Elsewhere, electronics good retailer JB Hi-Fi posted a 1.6 per cent drop in December-half sales, although that takes in the period prior to Omicron peaking.
Irvine, a former top executive with Canada’s Bank of Montreal, says business is remaining resilient to the Omicron wave, with few signs emerging of lending stress or drawing on borrowings, but many can only hold on for so long.
“That’s not to say it’s not going to come. It really depends on how long this period of reduced activity continues for. If it’s for a couple more weeks, I think businesses will weather it as they’ve weathered everything else.
“If it lasts much longer than the week of Australia Day, I think there’ll be more impact.”
He says any signs of a peak in numbers will be key, with early signs case numbers in NSW could have hit this point, although other states are lagging. Economists are closely watching the experience in Britain where case numbers started to fall away rapidly from the first week of January.
The summer squeeze on business highlights the urgent steps needed for Australia to get itself back on a path of Covid recovery.
“We need to get the population vaccinated as soon as possible to ensure the hospitals can withstand any increase in (Covid) volumes,” he says.
“If we get to a place where the hospitals can’t handle the caseload, that’s when governments may look to other policy levers. And none of us want that – any business owner would say we’ve got to stay open.”
Irvine says states need to resist the urge to close borders again and Australia needs to kick-start immigration.
“We need more workers. We need foreign students. And we need to just get back to life because we now need to learn to live with this virus.
“And perhaps the only silver lining out of all this is the more people that get Covid and the more people that get vaccinated ultimately gets you to a place where the pandemic becomes endemic,” he says.
“If anything we’ve shown Australians are resilient.
“We’ll get through this and the facts are that we are still calling for a pretty strong year of growth in Australia over the course of the full year.”
Rio keeps China faith
In assessing the risks coming down the road, Rio Tinto has taken a slightly more upbeat view on China.
It’s a brave call after China this week revealed its December quarter was hit with the slowest GDP growth in 18 months. Quarterly GDP of just 4 per cent undershot expectations and sapped momentum from stronger growth seen earlier last year.
Despite the very real property market slump undermining China’s growth, the Rio is betting on firm policy responses to reverse its slowdown. Here Rio noted the country’s transition from a “tightening to easing” stance.
Releasing its December quarter production numbers earlier on Tuesday, Rio called out the “mild pro-growth measures” now in place to support property, infrastructure and consumer demand. It also expects China to continue to fine-tune these growth policies where needed in the economy. It was this optimism from Rio that was missing in October as China was entering its slowdown.
As the teetering property giant Evergrande saps confidence in the nation’s property market, Chinese regulators are attempting to kickstart mortgage lending. The nation’s central bank this week cut two key interest rates, which boosts bank liquidity and could pave the way to a broader lending rate cut.
But property market problems remain a clear and present danger for the massive Chinese economy. Adding to challenges is the collapse in the global supply chain, which has been weighing on its manufacturing sector.
Brokerage UBS has highlighted the potential for as many as 10 property developers in China to default in coming months as US dollar bonds mature. This comes on top of 10 smaller developers defaulting on bond payments last year. With missed payments last month, Evergrande is on the edge. A disorderly collapse of the giant could send tremors through the Chinese economy, which is something policymakers are desperate to avoid.
Andrew Clifford of Asia-focused Platinum Investment manager suggests that despite the deep problems with Chinese property, the reforms pushed through by the Chinese government suggest markets have potentially seen the worst.
This includes the “Three red lines” policy for China real estate, aimed at tackling the debt building up in the sector. It also aims to provide support for better-managed developers with strong balance sheets to access cash and potentially acquire the good projects from those in trouble.
Clifford says China has recognised the precarious property issue and taken steps to regain momentum. However, he cautions that when China follows through on economic reforms “they do it aggressively and there’s always the chance of policy mistakes and overreach”.
For Rio, Chinese property matters. It is a major part of the domestic economy and one of the biggest drivers of sentiment around steelmaking and therefore the key commodity, iron ore.
Steel consumption and production rates in China slowed sharply during the fourth quarter of 2021, at the same time that iron ore supply increased.
This prompted a 30 per cent decline in iron ore prices in the fourth quarter versus the prior quarter. Iron ore prices have gradually picked up since the start of January to be now trading around $US126 a tonne.
Outside China, Rio is holding on to hope. While US GDP growth is likely to slow as the Covid recovery peaks, it still sees “solid fundamentals in place” even in the face of tighter monetary policy.
“Household debt has fallen to the lowest since 2000, supply shortages are expected to ease and inventory restocking should support growth,” Rio says.
It sees Europe as more challenging with economic activity weakening significantly towards the end of last year and the current level of Covid-linked mobility restrictions pointing to a slower-than-expected start to 2022.
johnstone@theaustralian.
com.au
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