Reprieve for PM as Reserve steers clear of politics

RBA governor Philip Lowe. Illustration: Johannes Leak.

Scott Morrison dodged a bullet on Tuesday when the Reserve Bank left interest rates on hold and consequently did not underline the fragility of the Australian economy after six years of coalition government.

Instead the central bank turned its attention to next Thursday’s labour market figures, where any further weakness will open the door to rate cuts this year.

Unemployment now stands at 5.1 per cent and any increase in this number will raise the chance of further cuts. Westpac’s Bill Evans is tipping cuts in August and November.

Heading into Tuesday’s decision the market was focusing on the latest inflation numbers, which show no growth. But this missed the emphasis on the labour market, which the RBA emphasised by pointing to the fact “there was still spare capacity in the economy and that a further improvement in the labour market was likely to be needed for inflation to be consistent with the target”.

NAB surveys show capacity utilisation bang on the long-run average but any weakening in this will help prompt the RBA to move.

A move would have been highly political, opening the door to the obvious banter from both sides, with the ALP attacking the government’s economic management and the government using the move to raise concerns about letting the ALP loose on a fragile economy.

Given official rates stand at 1.5 per cent and moves in monetary policy take 12 to 18 months to filter through the economy, you have to wonder what impact any move would have in any case.

It might provide a temporary lift in confidence but reality would soon hit home.

Now is the time for structural reform to boost productivity but this has not featured highly in the campaign, with neither side laying down a specific plan on just how they would jump-start the economy.

Take your pick then on who you want to run the economy: the government, which has demonstrably failed and avoided any structural reform, or the opposition, which wants to use its election to provide for a fairer allocation of resources, but with the exclusion of an investment guarantee it has failed to lay down its growth agenda.

The politicians’ read of the electorate seems to suggest the punters are not so interested.

The RBA has again cut its estimates for the economy and when its Statement of Monetary policy is released on Friday the market will get a view on just how low the barrier to more rate cuts has come.

GDP estimates are now down from 3.5 per cent last November to 2.75 per cent, but still well ahead of NAB’s Alan Oster at 2 per cent, and CPI at 2 per cent against 1.5 per cent.

The labour market is a lagging indicator, which raises some concerns about the central bank’s reliance on the measure, particularly as it has not proved to be any sort of seer in charting the economic future.

D-day for merger

Thursday’s ACCC decision on the $15 billion TPG-Vodafone merger is superbly timed ahead of next Wednesday’s release of the landmark Aurizon-Pacific Nation court decision by Justice Jonathan Beach.

In its draft the ACCC rejected the Vodafone-TPG merger because it would cut the number of mobile network operators from four to three, but TPG has since withdrawn from the market because the government banned its preferred supplier Huawei.

There are other issues involved and no matter which way you look at it the deal would cement a cosy Telstra-led telecommunications oligopoly, including Optus.

The argument goes that if TPG isn’t going to build a fourth network there is no cause for concern, so the two partners would complement each other.

The trade practices mafia is split on which way the decision will go, but the smart money says the ACCC will say no.

This will result in a court challenge, which is where the Aurizon decision comes into play.

The judgment will be one of the most important in terms of section 50 merger controls, because the ACCC is arguing the two partners are direct competitors, and by waving the deal through the court would be sanctioning a monopoly freight line on the east coast of Australia.

The betting among the trade practices mafia says the court will say ‘‘no’’ to the merger but ‘‘yes’’ to PN being allowed to continue operating the crucial Acacia Ridge terminal, which handles all the interstate trade.

That split would not suit the ACCC, which wants both deals rejected, opening the door for the likes of Qube with an alternative but lower priced bid.

The ACCC successfully blocked an attempt by Aurizon to close its loss-making intrastate container trade and arguably should have moved sooner to stop it closing its interstate intermodal business. But both moves are indicative of the motives behind the Aurizon-PN merger deal between the No 1 and 2 players.

ACCC boss Rod Sims has made clear his concerns about court interpretations of the law. The Aurizon decision is important because on paper the ACCC case looks solid.

Cosy clubs

Former ACCC boss Graeme Samuel will be addressing Wednesday’s well- publicised ACSI conference in Melbourne, where he will stress the role of directors in maintaining an ethical framework in their company and bemoan their failure to do so.

He can be expected to blame the men's and women’s’ director clubs for locking the door to other quality personnel who arguably could do a better job.

Samuels’ capability review of APRA is due at the end of June.

ACCC kicks the tyres

AP Eagers’ bid for competing Perth-based car dealer AHG is the first under new ACCC rules in which a formal clearance application allows the regulator to consider national interest issues in its decision before any appeal to the Competition Tribunal.

The car industry is in the doldrums, with low consumer and business confidence depressing sales, but arguably the more potent impact on the sector is regulatory change, including a crackdown on add-on insurance.

Insiders say many dealers didn’t care what price they sold the car at so long as they could pick up fees on finance and insurance, but that game is heading through the door post-royal commission.

To compound the matter the car companies are imposing limits on what the dealers can charge in servicing vehicles, so there goes another avenue to make money.

At some point the same carmakers will have to think about cutting better dealer supply terms, so the car sales people can make money by just buying and selling cars.

Structural change is also happening, with AHG following US-based CarMax with its Easy Auto model, based on big box retail outlets — a Bunnings for the car buyer.

Historically car dealers earned 1 per cent on selling a car, increasing to 3 per cent when insurance, finance and window tints are added and 12 per cent margins on service.

It’s an industry like many undergoing regulatory and structural changes, but that’s no excuse for unnecessary consolidation.