Finance

Consumer confidence boosts rate lift speculation… Climate change cost… Brumby’s sliced-up… Obscured mortgage foreclosure figures… Budget will grow workforce, says Treasury

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Record consumer confidence lifts 2007 interest rate rise speculation

Low unemployment and tax cuts for all in last week’s federal budget have driven consumer confidence to its highest level in more than 30 years, but wage growth remains at moderate levels, according to new figures released today.

The Melbourne Institute/Westpac consumer sentiment index shows consumer confidence rose 7.5% in May to 123.9 points, the highest consumer confidence result since the index’s inception in 1975.

But wage growth for the March 2007 quarter was just 1% or 4.1% for the year, well below economists’ expectations given recent strong unemployment figures and the strong performance of the retail sector.

NAB economist James McKinlay says while the strong consumer sentiment result will have caught the Reserve Bank of Australia’s attention, the moderate growth in wages is a clear sign that the heat in the consumer sector is not spilling over into inflationary pressures.

“The key message would be the flexibility in the labour market, and increased labour market participation means there is just enough supply to stop wages breaking out,” McKinlay says.

The combination of wages restraint and the risk of a stuttering US economy should mean the RBA will be prepared to watch and wait on interest rates for the rest of 2007, he says.

Westpac chief economist Bill Evans says the low wage growth result will surprise the market, which widely predicted a 4.5% annualised figure. But while he shares McKinlay’s view that labour market flexibility is helping keep a lid on wages, he says the RBA will maintain a tightening bias for 2007.

“Growth does not appear to be spreading into inflationary pressure at this stage, but I think it will happen this year and the RBA will have to deal with it,” Evans says. “The possibility of much earlier move cannot be dismissed.”

– Mike Preston

 

New report spells out global warming costs

 A CSIRO report commissioned by the Victorian Government on the effects of climate change, Infrastructure and Climate Change Risk Assessment for Victoria, says there will be increased risks to transport, telecommunications and building infrastructure from heat, floods, storms and bushfires, reports The Age.

Major infrastructure and water supplies will be very vulnerable. If the world continues polluting at today’s rapidly growing rate by 2030 the risks will include higher utility bills, water shortages, power blackouts and telecommunication outages.

Meanwhile, Senator Bill Heffernan has told The Australian Financial Review that the Government has received advice that the amount of water flowing into the Murray-Darling system may have been overestimated by as much as 40%.

It is looking more likely that there will have to be significant cutbacks in the water allocated to irrigators and farmers.

– Jacqui Walker

 

Michael Sherlock loses fight to control franchised bakery Brumby’s

Brumby’s co-founder Michael Sherlock has withdrawn from the takeover battle for the franchised bakery chain and resigned his position of managing director, reports The Australian newspaper.

Brumby’s board of directors has unanimously recommended shareholders accept ASX-listed franchise group Retail Food Group’s increased cash offer of $3.40 a share for the bakery chain. The offer beats Sherlock’s $40 million management buyout offer in January, which followed RFG’s $38 million takeover offer last December.

The new offer is an 88% premium to Brumby’s closing share price of $1.80 on December 15 last year, just before RFG launched its hostile takeover of the company. Sherlock and his MBO team decided not to make a higher offer.

The MBO team has sold 3.9% of its 21% stake in the company to RFG, with the rest to be sold later on. This has pushed RFG’s stake in Brumby’s to almost 20%.

RFG, which owns BB’s Coffee & Bake and Donut King, has been on the acquisition trail since listing last year. Chief executive Tony Alford has confirmed he is interested in the 350-store chain Michel’s Pattiserie.

– Jacqui Walker

 

Figures hide true forced home sale numbers

The true rate of home loan defaults in Australia could be up to 75% higher than the figures suggest, according to the chief executive of one of Australia’s largest debt recovery agencies.

Prushka chief executive Roger Mendelson told The Australian that for every one property seized by a bank, three are sold by the owner immediately before foreclosure in an attempt to get a better price.

Mendelson says banks are often keen to co-operate with an early sale because properties sold by banks as mortgagee in possession often suffer a hit to their sale price.

Official figures collected by the states currently only measure how often banks have gone through legal channels to take possession of a property, ignoring the larger number of pre-foreclosure forced sales. There are no national figures.

In NSW, 5363 writs of possession were issued last year, almost double the 2791 repossession claims lodged in Victoria, The Australian reports.

Sydney’s western suburbs are a hotspot for mortgage foreclosures. Some real estate agents operating in that area say up to 90% of properties coming to the market are forced sales.

– Mike Preston

 

Budget will increase workforce: Treasury

Treasury secretary Ken Henry says the low income tax cuts and child care tax rebates contained in last week’s federal budget will increase workforce participation

Henry told the Australian Business Economists Association yesterday that the increase in the 30% tax threshold from $21,600 to $25,000 will increase the labour supply by 0.1 hour per week. This will have “quite a significant” impact on Australia’s gross domestic product, he says.

In the context of an economy pressing up against capacity constraints, this is good news on two levels – not only does an increased labour supply help solve the skills shortage and keep wages low, it also reduces inflationary pressures.

– Mike Preston

 

Economy round-up

Short-term visitor arrivals to Australia decreased 4.3% in seasonally adjusted terms for April 2007 (480,600 movements), a big drop off after March’s 7.6% increase, according to Australian Bureau of Statistics figures released today.

Also from the ABS, merchandise imports decreased 5.2% to $14,579 million in April 2007.

The S&P/ASX 200 is down 6.2 points to 6285 points at 12.50pm, while the Australian dollar is worth US83.16c, just down on yesterday’s US83.20c close.

– Mike Preston

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