We're sailing well enough now, but beware storm clouds ahead
There are already signs that the “window of opportunity” for individuals and businesses referred to in last month’s newsletter, is closing.
True, six months after SA changed governments, leaders of the local division of the Australian Institute of Company Directors (ACID) report “there is a renewed sense of optimism in the business community”. They point to “positive results from government reforms”, and confidence in the State’s economic prospects.
Seemingly there is some justification for this view. SA’s unemployment rate is the lowest it’s been in six years, there’s been a renaissance in manufacturing, and the State’s total exports have increased 2.2% in the past five years.
However, this global business, now worth about $14bn annually, is unlikely to improve in the immediate future following the worst winter crops harvest in a decade, and mounting trade tensions that have already halved growth of wine sales in China. China is the destination of 19.5% of SA’s total exports, the US, 11.1%, and their trade war is generating increasing pessimism.
Indications of impending trouble
Storm clouds are gathering on the horizon. The world’s economic problems this year stem from uneven momentum in the US, struggling emerging markets (which represent 59% of the world’s purchasing power), and the apparent inability of so-called rich countries to deal with the recession most economists agree is on the way – even if it’s a mild one.
The Reserve Bank of Australia (RBA) biannual stability review, was released this month in a week where there were sharp sell-downs on Wall Street and $90bn was stripped from Australia’s share market.
By the end of October so-called “corrections” on international stock markets were beginning to look somewhat more sinister.
Yet the RBA seems none too worried by any of this, or by falls of house prices in major capitals, or the inability of thousands of debt-trapped homeowners to repay loans as interest rates rise.
(Read A window of opportunity to escape your debt trap in our October newsletter at www.macksadvisory.com.au.
However, the Bank has expressed concern that the impact on Australia of the US-China trade war, now “relatively modest”, might not remain so should further trade barriers affect business sentiment and decisions. The RBA’s review says Australia would be sensitive to any subsequent dislocation of global markets that restricted trade and “capital inflows”.
Latest figures available to Macks Advisory indicate China’s economic expansion is at its slowest rate since the GFC. The Shanghai Composite Index, the worst performer of recognised global benchmarks has declined 25% so far this year. Jittery share traders worldwide are finding it increasingly difficult to comply with requests from People’s Bank of China Yi Gang, insurance regulatory chief Guo Shuquing, and top security authority Liu Shiyu, to remain calm.
There’s also little comfort to be taken from the International Monetary Fund’s (IMF’s) decision, to cut its global growth estimate by two tenths to 3.7% on the basis of a worsening outlook for developing countries this year. The IMF sees rising trade tensions as a key challenge to the world economy while “protectionist rhetoric is increasingly turned into action”.
The background story
A year ago not only was every advanced economy growing, (with the exception of Britain’s) but most emerging economies were also tracking well. President Trump seemed to be making America great again, China’s inflation worries were dispelled, and the Euro zone was looking good.
Now, although Trump’s tax cuts have helped lift US annualised quarterly growth above 4% and unemployment is the lowest in 49 years, stock markets remain unimpressed. Likewise, the IMF believes that as growth slows this year in every other major advanced economy, current stress on emerging economies will worsen.
Italy already has serious problems, the rising greenback has pushed Turkey and Argentina into further economic trouble, and Pakistan has appealed to the IMF for help.
Two decades ago during the Asian financial crisis, emerging economies accounted for 43% of the world’s output but this is now nudging 60%. There are already signs these economies are spiraling down into serious trouble. As interest rates increase in America but nowhere else, the greenback strengthens which makes it increasingly difficult for any country to repay US-dollar debts – especially poorer countries.
If, as seems likely their troubles come back to bite America in the butt in sync with the expected decline of the current US boom, if Italy can’t get out of its current financial mess to Europe’s detriment (which would be no surprise) and if China’s economy dips sharply, then global recession could have a capital R.
Even if it’s a small r, richer countries are ill prepared to cope, their policy options depleted in fighting the last downturn. For example, the US Federal Reserve which has in the past 50 years cut interest rates by five percentage points or so during downturns, now has less than half that room to manoeuvre before hitting zero. The euro zone and Japan are already there.
Meanwhile in South Australia
The signing of major defence contracts, tax reform and a new focus on emerging industries including space, technology and advanced engineering, is inspiring SA’s business community with a healthy measure of confidence.
The establishment by the government of Infrastructure SA would seem to give the State a better chance of extracting infrastructure funding from the Federal Government than in the past.
Reports from Business SA, the Property Council, and Deloitte all support a recent claim by AICD’s SA/NT manager Clinton Jury that “there is great energy across the SA economy which is translating to strategic investment across all sectors”.
The manufacturing sector has indeed been a surprise performer. In the 12 months to the end of August this year, it added 93,100 jobs to the State’s workforce -- despite losses in the automotive industry and its supply chain.
On average manufacturing accounts for 7.4% of a State’s employment but in SA it’s 8%. Latest Australian Bureau of Statistics (ABS) national accounts figures show the manufacturing sector now has an annual production of $26bn, elevating it to a level of value to the economy not seen since 2014 -- which however is still $4bn below the all-time peak of $30bn just before 2008’s GFC.
So how would SA fare in another recession which most business analysts seem to agree won’t be as savage as the GFC but still significant?
Banking systems worldwide are more resilient than they were a decade ago. Australian banks were better able to cope then than most, and the hammering their managements have taken from the Royal Commission is not expected to detract noticeably from their ability to deal with what happens to the global economy in coming months.
There’s every indication too that SA real estate, buoyed by current confidence in the State’s future, will, if things go pear shaped, retain value better and for longer than elsewhere in Australia.
But the bottom line; South Australians and businesses living beyond their means in a country where indebtedness is higher than almost anywhere, appear to be facing rough times as part of a national economy that’s fragile.
Some uncomfortable indications
The number of South Australians declaring themselves bankrupt in the face of unmanageable credit card debt is increasing. Successful bankruptcy applications have increased from 1,454 in 2016 to 1,694 in 2017, and they’re trending upwards this year.
One in every two dollars earned by South Australians is being spent on housing, energy and telecoms – and that’s before anything has been spent on food, clothes and health.
Chief executive of South Australian Financial Counsellors Association, Wendy Shirley, says “many South Australians are only one trigger event from finding themselves unable to pay their debts and perhaps having to look at bankruptcy as an option”. (See Beware of your options in the face of bankruptcy in our October newsletter.)
Less obvious indicators of economic trends are, for example, the used car market (where sales tend to increase in tough times), and the Salvation Army’s services (where demand also increases in downturns).
In the financial year 2017-18 Australia’s biggest car dealership group, ASX-listed Automotive Holdings Group (AHG) sold 48,873 used cars up from 45,257 the previous year, while sales of new vehicles dropped by 300 in the same period. Dealers are now reporting “increasing opportunities in a heavily fragmented used car market”.
In SA annual average growth of used car sales has been 3.7% but next year it’s expected to be 5.2%.
This year the Salvation Army has registered 8,500 more clients for its Moneycare financial counselling services, headed by Mr Tony Devlin who says “it’s the biggest jump we’ve ever had”. He says people in “serious and extreme situations” are seeking help to manage debts six times their annual income.
It’s unquestionable in Macks Advisory’s belief that storm clouds are gathering over Australia’s economy. While the extent of damage they can wreak may be problematic, anyone who ignores them and fails to clear or at least reduce as much debt as soon as possible is taking unacceptable risk.
