Unstable and fragile

While there are real concerns about the impact of the two speed economy, even Glenn Stevens can see that external market forces should lead to caution about further rate rises before the election and the Government is supporting wage increases for the discount end of the consumer market.

Westpac’s Bill Evans thinks that we have now reached the tipping point in the rate rise cycle. We may have had six hikes in total from the RBA’s “emergency” trough of 3% on the cash rate all the way to 4.5% today, but the initial hikes were all about an Australian economy that was surprising all and sundry by not collapsing as originally assumed post-GFC.

It is important to note that the 10% drop in the value of the Aussie dollar means that the moans from the big miners are offset by a huge rise in the profits that they are keen to protect, and consumers are still making up their mind about who to trust.

Household are hearing a lot about budget cuts and are already seeing the impact of Tanner’s curbs on forward estimates and Andrew Robb’s list of proposed cuts to education, health and communications expenditure, and are being impacted directly by the world wide efforts to withdraw the stimulus packages and cope with the Greek debt crisis.

There is every reason to believe that stock market volatility is on the rise as investors rush for the remaining chairs in bond funds rather than even continue their flirtation with gold as a safe haven. Notwithstanding, there is reason for smart companies to build their export market connections and produce innovative products and services for the middle-income households of Australia.

Remember that wages rose a seasonally adjusted 0.9% in the first quarter of 2010 from the fourth quarter 2009 and rose 3.0% from a year earlier, according to the Australian Bureau of Statistics. In the private sector, wages rose 0.8% in the first quarter from the fourth and rose 2.6% from a year earlier. Public sector wages rose 1.2% in the quarter and increased 4.3% from a year earlier.

Middle-class consumers in the US are loosening the grip on their wallets, consumer confidence appears to be elevating and sales of discretionary items are increasing. As momentum of a broader economic expansion picks up and the labour market starts to stabilise, middle-class consumers are starting to shun away from low price alternatives, beaming a ray of sunshine on higher-end retailers.

The European contagion continues to spook the media just as business confidence was on the rise in the US, Germany, Hong Kong and a string of Asian countries. In the US consumers still are pressing Congress to challenge the banks to lend more to small business while leaving the hedge funds free to find capital for the big end of town.

In Australia there are conflicting reports on consumer sentiment. According to Gary Morgan, 42% of Australian consumers (up 9%) say that Australia as a whole will have ‘good times’ financially during the next 12 months, compared to 22% (down 1%) that say we’ll have ‘bad times’ financially in the next 12 months.

An increasing majority, 54% (up 3%) of Australians say ‘now is a good time to buy’ major household items while a falling 19% (down 2%) say ‘now is a bad time to buy’ major household items. In terms of Australians’ personal financial situation 44% (up 3%) of consumers expect their family to be ‘better off financially’ this time next year compared to 15% (down 2%) that expect their family to be ‘worse off’.

At the same time, the Westpac Consumer Confidence study that straddled the Budget announcement of a super profits tax on miners rises in superannuation contributions from 9-12% and potential corporate tax reductions showed Australian consumer confidence record its biggest fall since the 2008 collapse of Lehman Brothers.

This supports the view of US Target CEO that there are contradictory market expectations from consumers, sending a strong signal that rapid interest rate increases since late-2009 have started to squeeze the economy and pushing bets on when interest rates will next be hiked out into 2011.

US Target Chief Executive Gregg Steinhafel yesterday reported better than expected results but was forced to concede that: “We believe that both are still somewhat unstable and fragile and will likely continue to experience occasional setbacks as the year progresses”.

Steinhafel reported a 29% increase in first-quarter net income, a 5.5% increase in sales, a jump in sales at same stores open at least a year by 2.8% and increased foot traffic of 2.2%.

In Australia, smart companies will appreciate that imports are going to become more expensive, cashflows are going to be challenged and finance will be directed towards building a platform for longer-term export growth.

Now is the time to set things up for a steady period of growth and keep the best of the team focussed on the next few years rather than the next few months.

Election years are notorious for their capacity to encourage deferred household and business expenditures but all parties will be super sensitive about helping small and medium business enterprise in the next electoral cycle.

For more Futurist blogs, click here.

Dr Colin Benjamin is an entrepreneurship and strategic thinking consultant at Marshall Place Associates which 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
Contact: CEO Dr Jane Shelton, Phone +61 3 9640 0099