Focus on Australia

Australia’s Export Slump Intensifies Rate-Cut Pressure: Economy

Australia unexpectedly posted back- to-back trade deficits as coal and metal exports slumped, sending the currency lower and intensifying pressure on the central bank to resume cutting interest rates

Bloomberg,

4 April, 2012

Imports outpaced exports by A$480 million ($493 million) in February, from a revised A$971 million deficit a month earlier, the first consecutive shortfalls in two years, a Bureau of Statistics report showed in Sydney today. That contrasted with the median estimate in a Bloomberg News survey for a A$1.1 billion surplus as exports dropped 2 percent after a 9 percent decline in January.

The data boost the case for Reserve Bank of Australia Governor Glenn Stevens to lower rates at the May 1 policy meeting because overseas shipments account for about a quarter of gross domestic product. The Australian dollar rose in six of the past seven quarters, propelled by A$456 billion in resource projects by companies such as BHP Billiton Ltd. (BHP) that are trying to meet Chinese demand.

Today’s trade figures are “ringing alarm bells,” said Annette Beacher, the Singapore-based head of Asia-Pacific research at TD Securities Inc., who expects the central bank to lower borrowing costs in May and again in June.

Exports fell in February to A$24.4 billion, the lowest level in a year, the report showed. The value of coal exports, the nation’s second-biggest commodity export after iron ore, plunged 21 percent to A$3.4 billion, the least since March 2011.

Overseas sales of goods and services to India, Japan and Korea, which buy about 25 percent of Australian exports, all declined, it showed.

Dollar Falls

The Australian dollar touched $1.0264 in Sydney, the lowest level since Jan. 16, from $1.0306 before the data were released. The S&P/ASX 200 Index of stocks weakened 0.1 percent to 4,332.60 at 2:39 p.m. in Sydney, and three-year notes yielded 3.44 percent, heading for a third straight week of declines.

Imports also weakened, slumping 4 percent to A$24.9 billion on a 14 percent decline in consumption goods and a 12 percent drop in machinery and industrial equipment, the report showed.

Traders are pricing in an 87 percent chance the RBA will reduce borrowing costs by a quarter percentage point at the next policy meeting, a Credit Suisse Group AG index showed.

Stevens lowered the overnight cash rate target twice late last year to 4.25 percent. the highest benchmark among major developed economies. He paused yesterday for a third straight meeting, while signaling the central bank may resume cutting rates as soon as next month if weaker-than-expected growth slows inflation.

Weather Distortions

The trade data may have been distorted by weather for a second month, economists said. Cyclones in the nation’s northwest disrupted iron ore exports in January and floods in February swept across Queensland and northern New South Wales, both key coal producing regions, said Su-Lin Ong, head of Australian economic and fixed-income strategy at RBC Capital Markets in Sydney.

“While weather distorted, today’s trade data add to the view of an economy that is struggling,” she said. “Forecasts for first-quarter GDP are likely to be revised down with net exports set to detract more significantly from growth.”

China is Australia’s biggest trading partner and its demand for iron ore, coal and energy drove the nation’s terms of trade, or export prices relative to import prices, to a record high last year. Shipments to China gained 14 percent in February after slumping a month earlier as trade slowed during the Lunar New Year holidays.

Fed, China

Asian stocks fell today for the first time in four days as the U.S. Federal Reserve signaled it may refrain from more monetary stimulus. The MSCI Asia Pacific Index declined 1 percent as of 12:27 p.m. in Tokyo and Standard & Poor’s 500 Index futures lost 0.4 percent.

Chinese Premier Wen Jiabao highlighted challenges facing his nation during a provincial tour over April 1-3, saying some economic indicators are slowing, according to a statement from the state-run Xinhua News Agency last night.

Volumes of bulk commodities transported in the nation are dropping, indicating heavy industries such as steel, cement and non-ferrous metals encountered difficulties in the first quarter related to a slowdown in infrastructure construction, Wen said. The government will release policy fine-tuning measures as soon as possible, he said, adding that a key area is ensuring funding for ongoing investment projects.

The government plans to roll out new, large-scale projects under the country’s five-year plan that can have a big effect on the economy, he said.

European Monetary Policy

Elsewhere, the European Central Bank will leave its benchmark rate unchanged at 1 percent, according to all 57 economists surveyed by Bloomberg News before today’s decision.

Reports may show that the euro-region economy is struggling to regain strength after shrinking in the fourth quarter.

Euro-area retail sales probably fell for the second time in three months in February, according to an economists’ survey. A monthly survey of purchasing managers will probably affirm the initial measures, which showed euro-area services and manufacturing contracted in March, economists predict.

U.K. house prices probably fell for the fourth time in five months, economists predict. The gauge provided by Lloyds Banking Group Plc’s Halifax mortgage-lending unit probably fell 0.2 percent from February, according to the median forecast of eight analysts.

German Factories

Still, German factory orders probably rose in February after unexpectedly falling the previous month. Orders rose 1.5 percent, according to the median forecast of 35 economists.

In the U.S., a report may show that companies added fewer workers in March than a month earlier. Figures from ADP Employer Services may show companies added 206,000 workers, according to the median estimate of 37 economists. That’s down from 216,000 more workers in February.

Services industries in the U.S. probably grew at a slower pace in March, the Institute for Supply Management’s non- manufacturing index may show. The index fell to 56.8 from 57.3 in February, according to the median forecast of 68 economists.

The slower pace of recovery adds to the case for no change in U.S. interest rates. Policy makers yesterday affirmed its plan, first announced in January, to hold interest rates near zero through late 2014.

QE3 Plans

The Fed also signaled it is holding off on increasing monetary accommodation unless the U.S. economic expansion falters or prices rise at a rate slower than its 2 percent target, it said in minutes released yesterday of its March 13 meeting.

Australia’s economy lost 15,400 jobs in February as the sustained strength of the currency hurt employers in tourism and manufacturing, pushing up the unemployment rate for the first time since August. Even so, at 5.2 percent the nation’s jobless rate is still less than half the euro area’s 10.8 percent level.

Earlier today, a private survey showed Australia’s services industry shrank in March, the fifth contraction in the past six months, as the stronger currency cut sales and curbed new orders.

This is the destruction of demand, worldwide

Coal exports running out of steam

COAL and iron ore are losing their place as drivers of Australia's economic growth

SMH,

5 April, 2012

Unexpectedly bad trade figures for February show income from resource exports down for the second consecutive month.

Over the quarter, income from coal exports fell 19 per cent, and income from metal ores and minerals exports fell 10 per cent.

''The commodity price cycle peaked in the third quarter of last year,'' said the chief economist at HSBC, Paul Bloxham.

''Indeed, with global growth expected to be below trend and more commodity supply likely to come on stream over the next year or two, it appears likely Australia's terms of trade peaked in the third quarter as well.''

Australia recorded its second trade deficit in a row in February: $480 million after a downwards revised $971 million in January.

The balance had been in the black for all but one of the previous 21 months, the exception being flood-affected February 2011.

''It's just as well that we don't worry about current account deficits these days,'' quipped the chief economist at BT Financial Group, Chris Caton.

''The currency may fall, but that wouldn't be a bad thing. Oh, hang on, the currency has fallen.''

The Australian dollar fell from US103¢ to US102.7 in an unusual reaction to a trade report propelled by the belief it might herald a further slowdown in economic growth.

At issue is how much of a downturn was due to the timing of the Chinese New Year and bad weather choking coal supplies.

A JPMorgan economist, Ben Jarman, said the weakness in coal

exports seemed ''indiscriminate by destination''. ''That's consistent with the idea that the problem is at our end in terms of getting the supply out.'' The high Australian dollar has also suppressed the Australian dollar value of export receipts.

An Australian Bureau of Statistics analysis of quantity shows the volume of hard coking coal exported fell 27 per cent in February, while the volume of iron ore rebounded 16 per cent. The price per unit of hard coal fell 1 per cent, the price per unit of semi-sort coal fell 13 per cent and the price per unit of iron ore fell 2 per cent.

''There is no need to hit the panic buttons just yet. Having said all that, the second consecutive trade deficit is is unlikely to ease investor concerns about the extent of the slowdown in China,'' said an economist at Commonwealth Securities, Savanth Sebastian. 

''Even more concerning is that rural exports have fallen for the fourth consecutive month. It adds to the array of reasons why the Reserve Bank should be cutting rates.''

Australia Trade Deficit Rings Alarms Bells

A fall in coal exports produced Australia's second consecutive monthly trade deficit in February, adding to fears that the economy has slowed sharply in the opening months of 2012.

Wall Street Journal,

4 April, 2012

SYDNEY—A fall in coal exports produced Australia's second consecutive monthly trade deficit in February, adding to fears that the economy has slowed sharply in the opening months of 2012.

Australia, which is counting on a stellar export performance to fan its growth, recorded a trade deficit of 480 million Australian dollars (US$493.2 million) in February, the Australian Bureau of Statistics said Wednesday. The ABS also revised the January trade deficit, widening it to A$971 million. The Australian dollar and the stock market fell following the news, which was unexpected by economists. The average forecast was for a surplus of around A$1.1 billion.

Exports were down 2% and imports down 4% in February, the ABS said. Crucial coal exports were off 16% as mining was hit by bad weather and strikes.

Doubts about the strength of Australia's economy are forming rapidly as the trade picture sours at speed, giving the Reserve Bank of Australia a clear path to cut interest rates in May, economists said.

The central bank surprised financial markets Tuesday by highlighting a deteriorating picture for the economy, while adding that benign first quarter inflation data, due out April 24, will virtually guarantee an interest-rate cut in May.

The Australian dollar fell sharply after the trade news, extending a week-long slide that puts it at its lowest levels since mid-January—US$1.0284 as of 0625 GMT, down from an earlier intraday high of US$1.0332. The stock market's benchmark S&P/ASX 200 index, after falling following the data, finished nearly unchanged for the day.

Falling commodity prices, strikes at Queensland coal mines and the crushing impact of the elevated Australian dollar were factors in the surprise trade result. Others said the timing of Chinese New Year may have played a role.

"This report rings alarm bells," said Annette Beacher, head of Asia-Pacific Research at TD Securities in Singapore.

The downturn in trade could shave 0.5 percentage points off economic growth in the first quarter, she said. The economy grew by just 0.4% in the fourth quarter of 2011.

Imports of capital good were also weak, raising doubts about the strength of the investment boom in Australia, she said.

With more than A$400 billion on the slate for investment in mining over coming years, the outlook for Australia's economy is thought to be robust. But recent data have been weak, Treasurer Wayne Swan has warned of falling tax revenues, consumer spending has remained muted and fears are growing of a slowdown in China.

"We've seen exports fall in level terms to the lowest in a year, which does show the impact of commodity prices and does suggest a weaker underlying trend of demand," said George Tharenou, an economist at UBS. "It does show you that the impact of lower commodity prices is starting to wash through the economy and will result in lower export incomes."

Australia is being clobbered across the board

Australian aviation market shows signs of slowdown just as airlines were enjoying yield premiums

Australian aviation market shows signs of slowdown just as airlines were enjoying yield premiums

Centre for Aviation,

4 April, 2012

There are now clear signs the Australian aviation market is entering a light slowdown, with carriers adding capacity ahead of demand while airfares decline marginally. This will affect the region's carriers differently and they should all fare better than counterparts elsewhere in the world; notably, the market in Australia is still growing, but not as fast. Most exposed are Qantas mainline and Tiger Airways Australia. The former has been slowly losing some corporate business to Virgin Australia and competes with a higher cost base.

Tiger is suffering from group-wide over-capacity and would not be able to redeploy capacity as readily. Unlike Tiger, Jetstar has a healthy and rapidly growing pan-Asian network that can absorb any surplus capacity and at a higher margin even than in Australia. Virgin Australia is seeing yield growth from its transition to a business carrier, growth that should overcome any weakness in the more leisure-exposed areas of its business.

Should the downturn become any more significant, the Qantas Group will be further pressed to justify maintaining a 65% market share when more profitable opportunities exist in Asia – while banks and aircraft financiers ponder if they will continue to give Qantas favourable leasing rates following its credit downgrade.

Qantas and Virgin Australia expand domestically as 

Jetstar slows

For rest of article GO HERE

Public servants face axe in $500m budget cuts

the Age,

5 April, 2012

MORE than 1500 federal public servants are set to lose their job, as the Gillard government prepares to release a tough budget in May that could trigger even greater job losses in the bureaucracy.

Most of the initial 1500 jobs expected to be shed will be based in Canberra, and are a result of a government attempt to save about $500 million on public servants. But even more jobs could now be cut as a result of next month's budget, in which the government will pare back its expenditure to try to deliver a surplus. Public sector unions yesterday warned that cuts that went too deep would ultimately hurt the economy.

Prime Minister Julia Gillard acknowledged yesterday that the bureaucracy was bearing the brunt of her government's decisions. ''I am a big supporter of the public service but, as a government, we have had to make tough decisions to generate a budget surplus for 2012-13.''

Her comments came as the Regional Affairs Department said it would reduce its 650-strong workforce by 66 people. The job losses, the secretary of the department told staff at a meeting yesterday, would occur by not renewing contract positions and consultancies, cutting some management roles, and offering a limited number of voluntary redundancies.

Those job losses follow the Department of Climate Change earlier this week revealing it would slash its workforce by up to 300 staff. The two workplaces join a growing list of agencies that have announced plans to let staff go, including the departments of education (500 jobs) and treasury (150). .

Community and Public Sector Union national secretary Nadine Flood said the spending cuts would inevitably lead to thousands of job losses.

''The government needs to ask whether it really is essential to return the budget to surplus now, and whether they risk damaging the economy by making cuts that are too deep.''

Ms Flood said the cuts at the Climate Change Department would stymie its ability to get any work done. ''A cut of this magnitude must damage the department's capacity to lead our efforts on climate change,'' she said.

However, the opposition's shadow secretary for the environment, Senator Simon Birmingham, told the ABC yesterday that the job losses were a consequence of the government's ineptitude. ''Clearly the public service is bloated and [that] is part of the enormous waste this government has undertaken,'' Senator Birmingham said.

Greens deputy leader Christine Milne criticised the Climate Change Department job losses, saying the government should cut wasteful subsidies to mining companies, rather than sack ''people whose job it is to help protect the climate''.