Australia’s corporate earnings season has seen a solid strong results this month and equally positive dividend announcements from Australia’s banks and other big companies.
JB Hi-Fi reported solid results, the Commonwealth Bank increased earnings by 14% and has a dividend yield of 5.4%, Telstra raised its dividend for the first time since 2005 and BHP fairly blew expectations out of the water.
But even as Australia’s large corporate sector is doing well it seems like the rest of the economy – and consumers – might just be getting left behind.
Take the release last week of the NAB Business survey specifically for the ASX 300 companies. The NAB said “Business conditions for ASX 300 surged 18 points to +11 points in the December quarter of 2013, (from -7 points in the previous quarter) – the highest rate since Q1 2011.” At the same time, however, business conditions for companies in the whole economy rose to only +1.
This is just a tiny increase on the previous quarter – hardly the stellar rise larger companies saw.
The NAB said the jump was driven by improvements in trading and profitability, while employment trended up but was still in “contractionary territory”.
It is a scenario which fits with the results we are seeing in earnings season but it also begs the question: what gives for smaller companies?
Perhaps it all comes back to consumer confidence and the ability to cut costs at bigger firms, which is an option not available to smaller companies on comparable scales.
BHP’s results are a prime example. Productivity improvements were a large part of the overall improvements. These often mean that there are less workers per unit of output or equally, that the workers are driven harder, or given technology to increase their output.
It’s not a scenario that sees jobs grow strongly, and that’s what seems to be happening in Australia at the moment.
Unemployment has ticked up to a decade-high of 6%. A constant flow of bad news on manufacturing closures seeps across the airwaves.
But what you need to layer on top of this is that it seems Australian consumers might have become structurally more pessimistic than they have been in the past.
Take the mining investment boom that helped insulate the Australian economy from the worst ravages of the global financial crisis. It bought vast national wealth, employed many people who would have otherwise been out of work on wages they probably never imagined they would receive but Australian households seems to only focus on the negatives missing the fact that Australia was the envy of pretty much every developed economy’s central bank and politicians.
The problem for the economy though was that the love that foreign investors and central banks felt for Australia had drove the Australian dollar to an unprecedented level of $US1.1080 in 2011.
This combination together with household restraint as they turned outward to the problems offshore not inward toward an economy racking up its 19th, 20th, 21st and 22nd year of uninterrupted growth drove the emergence of what was a two-speed economy.
Mining was booming, as was outbound tourism from Australia but industries such as manufacturing, local tourism and education suffered under the weight of a high Australian dollar and local consumption restraint. Households were’t spending to fill the gap, they were saving.
Indeed the local gloominess relative to how the outsiders who were happily bidding the Aussie dollar up to all time highs prompted RBA Governor Glenn Stevens to deliver a speech in Adelaide in on June 8th 2012 titled The Glass Half Full.
Stevens summarised the situation at the time saying:
an objective observer coming from outside would, I think it must be said, feel that Australia’s glass is at least half full.
Yet the nature of public discussion is unrelentingly gloomy, and this has intensified over the past six months. Even before the recent turn of events in Europe and their effects on global markets, we were grimly determined to see our glass as half empty. Numerous foreign visitors to the Reserve Bank have remarked on the surprising extent of this pessimism. Each time I travel abroad I am struck by the difference between the perceptions held by foreigners about Australia and what I read in the newspapers at home.
Much has changed in the past 18 months with the mining boom past its peak and the Aussie dollar more than 20 cents below its high at 90 cents. But the one constant seems to be that consumer gloominess is becoming part and parcel of the fabric of Australian households.
After a brief bounce following the election of the Abbott Government back in September, consumers have become gloomy again – which is of course easy to understand with all of the bad news in the air about Ford, Holden, Toyota, Alcoa and even Shell’s assets in Australia making the headlines. It seems this is weighing on households.
Indeed, Westpac noted in its Redbook – which is a deep analysis of its Consumer Sentiment survey – last week: “The sub-index tracking views on ‘time to buy a major item’ declined 1.9% in Feb, marking a significant 4.5% decline over the last 3mths”
It’s still above the long run average but it seems once again that consumers are focussed on the cloud not the blue sky. Worrying about your job has that effect.
There is much expectation that the Australian economy needs a slower dollar and an uptick in domestic consumption to aid in the end to the mining investment boom. For the moment however households are not playing ball. While retail sales have picked up nicely over recent months there is scant evidence of the wealth effect of higher house prices or the recent strong performance of the Australian Stock market is having any impact on sentiment.
Maybe in time with a lot of bad news out about manufacturing closures and with a relatively low Aussie dollar relative to the past 3 years households and consumers might feel emboldened to spend more and be less gloomy.
On the other hand this might just be the “new normal”, until strong corporate profits lead to increased employment and the spreading of economic strength into the smaller company sector of the economy.
The RBA will be watching.