THE WEEK AHEAD: Gauging the recovery

Much of the data that is produced each month highlights changes in the economy. For instance, data on business investment, retail sales or building approvals are helpful in gauging whether activity is expanding or contracting.

But from time to time statistics are released which update information on the structure of the economy or the way businesses operate. One such data release is ‘Selected Characteristics of Australian Businesses, 2007-08′, issued by the Australian Bureau of Statistics on September 17.

Not only does the report provide the latest information about Corporate Australia, but it also challenges perceived wisdom. For instance, the latest data shows that the proportion of foreign ownership hasn’t changed much in the past three years. In 2007-08, 97.6% of Australian businesses were wholly Australian owned. The general perception is that foreign ownership is much higher. And certainly for large businesses that is the case. Of companies with more than 200 employees, 68.1% were wholly Australian owned in 2007-08, down from 71.7% the previous year and compared with 70.7% of businesses in 2005-06.

One area of concern – especially for the Reserve Bank – was the question concerning competition levels. Overall, just over 16% of companies said there was minimal competition in their sector while just over 13% said there was no effective competition. If just under a third of companies are experiencing little competition, inflation may end up remaining higher than desired. The Government is trying to boost competition in telecommunications but it may need to expand its sights to other industries.

The least competitive sectors are mining and health care while the most competitive conditions can be found in wholesale trade and retail trade.

Turning to e-commerce, it’s clear that more business are buying and selling goods over the web, but there is plenty of scope for growth. Slightly fewer than 43% of all businesses placed orders over the internet in 2007-08 while almost 24% received orders online. In 2007-08 total internet-related income for businesses was $81 billion. The ABS didn’t quantify the proportion of total sales taken by the internet, but if you use the national accounts estimate of sales, it means that just over 10% of all sales are conducted online.

Internet income accounted for between 10-50% of income for 29% of firms while internet income accounted for more than 50% of income for 15% of businesses. Still, at the other end of the spectrum, internet income was less than 1% of the total for around 39% of companies.

The week ahead

The coming week should prove an ‘interesting’ one for investors. There may not be any ‘top shelf’ economic data releases, but the scheduled events should offer rewarding insights for those that pay attention.

On Monday, the Senate conducts an inquiry into the stimulus being applied to the economy – more specifically, to determine if there is a case for winding back government spending in the economy. While it is prudent that this issue is being addressed, it is far too premature to be discussing a wind-back of economic stimulus.

On the same day, figures on car sales will also be released – a key component of spending in the economy. CommSec expects that car sales lifted by 2% in August, underpinned by the Government’s tax break for small business.

On Tuesday the latest demographic (population) figures are released. Many investors may be unaware of the fact, but Australia’s population is growing at the fastest rate in 40 years. While many reasons have been proffered to explain the amazing resilience of the Australian economy, our fast rate of population growth must be counted amongst them.
The Reserve Bank also releases its semi-annual Financial Stability Review on Thursday. This report takes on added importance in the current environment given that the Reserve Bank has indicated that it is watching “the effects of economic weakness on the balance sheets of financial institutions”. Before the Reserve Bank lifts rates, it says that “continued progress in restoring balance sheets is essential”.

And on Friday the quarterly financial accounts are released. The figures should show a sharp improvement in the health of household finances while other data will likely provide further evidence of the deleveraging of company balance sheets.

In the US, a meeting of the Federal Reserve interest rate-setting body – the Open Market Committee – dominates the first half of the coming week. The FOMC meets over Tuesday and Wednesday with a decision on rates announced at 4.15am AEST on Thursday morning. The FOMC won’t be changing rate settings – at least not this month. But members are well aware of the risks in leaving rates too low for too long. So expect more upbeat rhetoric about the state of the economy and future prospects. Before lifting rates, the FOMC must get borrowers and investors prepared for change.

In terms of economic data, the leading indicators report is issued on Monday with the influential Richmond Fed index on Tuesday. Data on existing home sales is released on Thursday while new home sales, durable goods orders and updated consumer sentiment figures are all issued on Friday.

The latest economic data should prove encouraging. Both durable goods orders and existing home sales probably rose by 1.5% in August while new home sales lifted around 4%. Any reduction in the stock of homes for sale on the market will provide further encouragement for investors.

Sharemarket

The rising Aussie dollar has key implications for investors, not the least of which is that it has been linked to a stronger sharemarket in the past. One reason is that when the global economy is strengthening, there is greater demand for raw materials like copper and lead, and that boosts Australian export income and economic growth.

Retailers and media stocks also tend to gain when the Aussie is rising as it reduces the local cost of imported goods and overseas TV programs. But it is not all one-way traffic. Some companies get a high proportion of income from overseas and a stronger currency reduces the value of that income in local currency terms.

Interest rates

The sharp appreciation of the Australian dollar over the past six months is yet another reason while the Reserve Bank is not in a rush to lift interest rates. The stronger currency is making life tougher for exporters while also restraining import prices and inflation. If the Aussie continues to lift towards US90 cents over the next few months then the Reserve Bank is likely to delay plans to start the rate-hiking cycle until early in 2010.

Currencies & commodities

The US dollar is continuing to lose friends across the globe. The US dollar index has fallen to the lowest levels in a year, as investors embrace the currencies of countries that benefit most from global economic growth. The US dollar index is down almost 15% from the three-year highs set in March.

The Aussie dollar is one of those currencies that benefit from the global upswing. From the lows in early March, the Aussie dollar has soared 36% against the greenback, lifting from US63 cents to US87 cents. And given its ties to the greenback, the currency of Australia’s largest trading partner – the Chinese renminbi – has similarly fallen by around 36% against the Aussie.

But while the Aussie dollar’s gains against the weak greenback have been impressive, the performance has been more mixed against other currencies. In fact, the Aussie dollar has fallen by over 4% against the Kiwi dollar since March 4 while rising 7% against the Korean won, lifting just over 17% against Pound Sterling (to 13-year highs) and rising 17% against the Euro.

Craig James is the chief economist at CommSec.