Rate rise risks

If smart companies have not revised their business and marketing plans for 2010, now is definitely the time to visit both accountants and the lending manager of the local bank branch. Overseas currency speculators are convinced that the dollar is heading towards parity with the US dollar, as central bankers become more concerned about a global inflationary surge fuelled by continuing stimulus packages.

Gary Morgan reports that the weekly Roy Morgan Consumer Confidence Rating has jumped strongly to start the New Year — up 7.4 points to 127.8. It is now at its highest for more than two months, since early November (128.0).

Across the board gains in all indicators are behind the jump — now 47% (up 7%) of Australians say we’ll have ‘good times’ financially in the next 12 months and 48% (up 6%) of Australians expect continuous ‘good times’ over the next five years.

“The traditional Boxing Day sales have also spurred many to the shops with 56% (up 4%) of Australians saying ‘now is a good time to buy’ major household items — this indicator was only higher than this during one week throughout 2009 — it is 8% higher than the first week of January 2009” says Morgan.

Retail sales climbed 7.3% in the past year leading to expectations that despite this being an election year, Glenn Stevens will feel the need to slam on the breaks with a set of rate rises starting on February 2.

It is not yet possible to determine whether the early stocktake sales by the major retailers, the heavy discounting and run down of imported inventories from the era of a high Australian dollar or changes in household expectations lie behind the improving terms of trade, but the RBA will get the December sales data just before it meets to set a .25 or .5 rise in lending rates to small business here.

It is interesting to note that China has already become concerned about the impact of its massive stimulus package designed to curb the growth of its unemployed to more than the total population of Australia. The rise in Chinese interest rates and curbs on bank lending should be taken as a sign that Australia’s reliance on China as the tractor that will pull the world’s economy out of the GFC bog may be over-rated.

China is witnessing a liquidity-driven recovery of the stockmarket and the real estate market. Real estate prices have come back to 2007 levels, which was a historic high. But rents are very low, which means returns are low. This is a classic symptom of a bubble. The stockmarket is also clearly a bubble. In August, there was a massive sell-off of stocks because the government put out a statement raising some concerns about loan growth.

The fact that Australia is doing better than other countries does not justify expansion or risky extensions into new markets before all of the stimulus packages are withdrawn and a new stabilised market has emerged. It is likely that the US commercial property market will see a further collapse this year forcing the Obama administration to continue to pour taxpayer dollars into the pockets of regional banks and institutions for another year.

In this climate, smart companies will take the opportunity to look very closely at their forward order book, identify areas of business, including customers that will need to improve their contribution to profits rather than turnover, and secure long-term finance before the banks find new excuses to delay bridging finance deals.

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Dr Colin Benjamin
Entrepreneurship and Strategic Thinking Consultant 
Marshall Place Associates offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship.

Email dr.colinbenjamin@marshallplace.com.au
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