Monday, 30 April 2012

The weakening Australian economy

I have a strong suspicion that the Australian media might be a tad more honest than the NZ media.  Am I supposed to believe that the NZ economy is faring better than the Australian?

Weak Australian economy causing US corporate concern
REPORTS of prolonged weakness in the Australian economy continue to echo through the boardrooms of some of the biggest companies in the United States as a growing chorus of chief executives bemoan the dour conditions in the region to American investors.

30 April, 2012

The spreading pessimism around Australia's sluggish economic growth, and in particular a lethargic retail sector, will feed into pressure on the Reserve Bank to slice official interest rates tomorrow with many economists tipping a rate cut of 50 basis points.

Such is the economic malaise in Australia that it has landed on the agenda of company CEOs and directors in the US, with the current earnings season in North America peppered with negative commentary about the region's poor economic credentials.

Last week the chief executive of Illinois Tool Works, a 100-year-old manufacturer and Fortune 200 company, told an audience of US analysts that the Australian economy was ''slowing significantly'' with the downturn taking his company by surprise.

''I think the one that was the weakest, that probably told the story for us, was Australia,'' said David Speer, chairman and CEO of Illinois Tool Works, a diversified manufacturer that makes products for the construction and housing industry.

''Some of the economic issues there, the housing market has slowed significantly.

''Australia is probably the one that caught us with the biggest surprise.

And in the retail segment down there where we have reasonable presence, this is where we expect to see some good retail activity, and that just hasn't picked up at this stage.''

He has been joined by the chief executive of US cereals company Kellogg's, one of the largest food companies in the world, who told analysts last week that internal operating profits in the Asia Pacific decreased by 1 per cent due to weakness in Australia.

Kellogg's chief executive John Bryant said at first quarter earnings briefings the Australian business had posted a low single-digit decrease in internal sales. ''The Australian market continues to be difficult, both cereal and snacks categories posted declines.''

Last week the incoming chief executive of McDonald's, the biggest restaurant chain in the world, singled out Australia in his quarterly earnings update saying the country was experiencing ''ongoing tightening''.

During last week's quarterly earnings update for Illinois Tool Works, executive vice-president John Brooklier talked about the state of the two-speed economy and fears the faster speed, mining and resources, was also showing signs of a slowdown.

''If you really look at what's going on in Australia, the economy is slowing. Some of the mineral-related exporting going on to China slowed a little bit as China slowed a little bit,'' Mr Brooklier said. ''So I would say the service side of the economy in eastern Australia is certainly a lot slower, as is the western side, where it's really more natural resources. That has slowed a bit, too.''

In November, Denise Morrison, chief executive and president of the New Jersey-based Campbell Group told investors Australian shoppers were increasingly reflecting a ''recessionary mindset'' that was having an impact on grocery sales.

Albert Stroucken, executive chairman of Owens-Illinois, one of the world's biggest bottle glass suppliers, also late last year used the term ''recession'' to describe the mood of local shoppers.

Insolvencies at a record high for small businesses
INSOLVENCIES across Australia's small business sector are soaring, with the number of companies placed into external administration in February at the highest level since the statistics were introduced in 1999.

30 April, 2012

Australian Securities and Investments Commission statistics show 1123 businesses were placed into administration in February, compared with 518 in January, with the next highest figure on record in March 2009 when 1095 businesses went into administration.

Behind the latest surge is a sharp rise in the number of businesses being wound up through the courts, which also reached a record of 449 in February compared with 79 the month before. This represented 40 per cent of the total number of businesses placed into administration.

According to insolvency industry experts, the rise in court wind-ups is mainly being driven by the Australian Tax Office seeking to recoup unpaid tax debts.

"The data is clear that in terms of companies entering external administration, the month of February 2012 had the highest number of companies in that position on record," said Denise North, chief executive of the Insolvency Practitioners Association of Australia.

"What's interesting is the mix of appointments in the financial year to date, and what you can see there is that there's the highest number of court liquidations by type of appointment since 2009," she said.

"What you have with court liquidations is you're frequently talking about an appointment where there's very few assets left and the company may not be trading. Many court liquidations are driven by Tax Office activity and by workers compensation insurers who need to wind up businesses for legal reasons."

ASIC's data shows businesses with fewer than five full-time- equivalent employees accounted for more than half of those placed into external administration in the year to June 30, 2011, with the construction sector accounting for almost 24 per cent of the 4963 smallest businesses wound up.

The biggest nominated cause of failure by external administrators was poor strategic management, followed by inadequate cash flow, trading losses, poor financial control and poor economic conditions.

"There's a strong sense of paralysis out there in the general business community at the moment," said Morgan Kelly, a partner at national insolvency firm Ferrier Hodgson.

"The larger companies and businesses appear to be in pretty good shape. A lot of them are de-leveraged and are going well. But not surprisingly the SME [small, medium enterprises] sector is in the grip of paralysis."

However, Mr Kelly said that business conditions in the insolvency sector itself had slowed in recent times because banks were reluctant to force companies into receivership.

" … You've still got a lot of Tax Office liquidations and companies going into official liquidation and the court lists are still busy, but in terms of enforcement the insolvency market itself is slowing.

"The reason for that is that with the reduction of available liquidity in the SME sector there is obviously a less-active market for most assets. And when there's a less-active market for most assets, generally receivers aren't going to be able to sell anything any better than anyone else. The banks are leaning more towards work-outs and negotiated outcomes than actual enforcement."

Mr Kelly said banks were now much more likely to generate a tailored solution to keep a business running rather than move quickly to wind it up.

Another trend was that more and more older Australians who owned businesses were choosing to hold on to them in the current economic climate rather than selling out at deflated valuations.

"What we're also seeing at the moment is probably an unprecedented number of self-employed baby boomers who have businesses and don't want to sell them because the market is so slow. It's a massive problem.''

Slow growth casts cloud on bank profits
AUSTRALIA'S big banks are poised to hand down more than $12.5 billion in first-half profits over the next two weeks, with earnings helped by the repricing of mortgages and business loans.

30 April, 2012

However with signs that lending losses are again drifting higher and banks are feeling the squeeze from higher funding costs and stalled revenue growth, the headline figures will mask a more sombre tone. Indeed, the results will represent the slowest pace of earnings growth for the sector since the depths of the financial crisis.

''This is likely to be the low point for bank earnings with the prospects for stronger growth in the second half of 2012,'' said James Freeman, an analyst with Deutsche Bank. He expects improved profit momentum over the next six months, helped by better margins on lending, improved markets income and lower restructuring costs.

ANZ kicks off the first half reporting season on Wednesday with an expected 5 per cent increase in interim profit to $2.9 billion. After coming under criticism for a series of out-of-cycle mortgage rate rises, ANZ's interest margins are likely to come under focus.

Meanwhile, Westpac is expected to rebound slightly from a disappointing first quarter. The lender is poised to deliver a first-half profit of $3.2 billion, which is largely flat on the same time last year.

Nomura's Victor German believes Westpac can reverse trading losses suffered during the first quarter, while the bank is likely to remain tough on costs.

The subdued pace of revenue growth means all banks are under pressure to be tough on costs, which has already led to a round of widespread job cuts by ANZ and Westpac.

Later next week National Australia Bank is set to report a 4.8 per cent increase in interim profit to $2.8 billion.

After years of hedging on whether to grow or exit the British operation, NAB chief Cameron Clyne launched a review of the business in February, possibly leading to a sale or some scaling back of operations. Mr Clyne has promised to update investors of its review by the bank's results presentation on May 10.

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