Economy

Soaring dollar hurts exporters… Franchising boom rolls on… Energy’s constraining prices… Rudd’s water promise… Hey, look at Europe… Economy roundup…

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Soaring dollar hurts exporters

The Australian dollar hit US85.1¢ in trading last night, the first time it has pushed through the US85¢ barrier since 1989. It was back to US84.63¢ at 11.15 am today, but analysts say exporters need to brace themselves for it to go as high as US86.5¢ in the months ahead.

Jim Vrondas, Ozforex’s manager of corporate business, says some profit taking in the lead-up to the end of the financial year this week might see a temporary easing in the dollar, but it is more likely to be over US85c than under in the months ahead.

He says if strong economic conditions in Australia and Asia persist and July’s CPI figure is higher than expected, it is likely we will see an Australian dollar above US86¢, despite option selling above US85¢, that has kept a lid on the value of the dollar so far.

Commonwealth Bank currency strategist Besa Deda says currency trading backed by Australia’s relatively high interest rates, strong economic growth in Asia and relatively high base metal prices, are behind the Australian dollar’s strength. She says if these factors continue to be as strong as expected we should see a dollar at US85.5¢ by the end of July.

This will not be welcome news for Australian exporters. Westpac chief economist Bill Evans says although strong demand in Asia has so far limited the pain exporters have felt from the high Australian dollar, continuing increases will start to bite heavily on business in the export sector.

Export manufacturers have been feeling the impact of the high Australian dollar for some time, according to the recent AiG-PricewaterhouseCoopers Survey of Australian Manufacturing.

“The recent rise in the exchange rate has already emerged as a significant headwind, with over one in 10 manufacturing exporters citing it as the major constraint on production in the quarter, group chief executive, Heather Ridout says. The short-term forecast for exports is also the lowest since the September quarter 2005, and at a level that has typically been followed by outright declines.”

Bruce Grant, the managing director of blanket and bedding exporter Waverly Australia, says the Australian dollar is already having a big impact on his businesses profit margins.

And, he says, if the dollar goes much higher he will have to start passing the cost on to buyers in the form of higher prices – and that will hit sales.

“Another 10% increase would make it extremely difficult for us – perhaps it won’t go that high, but then I wouldn’t have thought it would get to US85¢,” Grant says.

– Mike Preston

Franchising boom rolls on

New figures from IBISWorld paint a very rosy picture for the franchising sector, predicting that the sector will double in size by 2020 to contribute 24% of GDP. The report, which estimates revenue of $133.5 billion for the industry in 2006-07, an increase of 6.8% on the last financial year, predicts growth of 6% a year forecast for at least the next five years.

But these could be optimistic predictions given the widespread difficulties the sector is facing recruiting franchisees and the problems big and mature chains face in securing new profitable sites.

And there have been a few well-publicised disputes highlighting the profitability problems being experience by marginal franchisees in some franchise systems. Federal Small Business Minister Fran Bailey responded to unrest in the industry by calling a review of regulation on pre-sale disclosure and some of the recommendations for new regulation will soon become law.

Despite these risks, IBISWorld predicts franchising will extend into new sectors: legal firms, psychology practices, day spas, fitness clubs, tanning lounges and hairdressers.

Mark Ganz, senior industry analyst at IBISWorld, says: “Many of the areas where there is franchised business it’s just the tip of the iceberg. As people become more savvy and become more effective marketers, new franchises will enter new industries. These are untapped markets.

“Right now there are more franchised businesses than franchisees, but over time that will adjust. Right now there are a lot of micro franchises, a handful to up to 20. Many of these won’t succeed, but of those who do people will flock the ones that do. It’s about marketing.”

The fastest-growing sector in the past two years has been personal and home services sector according to the report. It estimates growth by 89% thanks to growing disposable incomes and appetites for pampering.

– Jacqui Walker

Energy’s constraining prices

Retail energy prices must be allowed to rise to secure sufficient investment in energy infrastructure, according to a new report prepared for energy industry.

The report says scrapping state government controls on retail energy prices and allowing a free market to operate could contribute an extra $400 million to the Australian economy, The Australian Financial Review reports today.

The report says utility prices are likely to rise in Western Australia, Queensland, Victoria and New South Wales to fund big infrastructure spending now required to compensate for years of neglect.

– Mike Preston

Rudd’s water promise

Opposition Leader Kevin Rudd has promised to give $500 to up to 500,000 urban households to help them buy rainwater tanks if he wins the federal election later this year.

The policy commitment, costed at $250 million over six years, follows Rudd’s previous promise to provide interest-free loans of up to $10,000 to households seeking to implement water and energy efficiency measures.

Rudd used the announcement to criticise the focus of the Government’s National Water Plan on the Murray-Darling, saying Australia needs a long-term urban water strategy.

– Mike Preston

Hey, look at Europe

Europe is Australia’s hot new export market, according to the latest DHL/Austrade Export Barometer. About 65% of exporters expect a jump in orders to an economically recovering Europe overshadowing China, from which only 61% expect more orders.

The survey looked at 364 exporters, mostly small and medium businesses. It found that despite a rising Aussie dollar and high fuel prices, Australian exporters are confident about the future although manufacturers say they are constrained by a shortage of plant, skilled labor and capital and by supply chains.

“A return to the more traditional markets such as Europe suggests exporters are diversifying their opportunities, although China and South-East Asia continue to remain strong as key trading partners,” Austrade’s Tim Harcourt said today.

Astonishing though was, the fact that a lot of exporters do not use the internet to sell or market online. Only 37% say they market online and 48% say they market and sell online. But 15% don’t use any online marketing or selling. About 31% say they make more than 50% of export sales from transactions on the internet.

Meanwhile, the value of Australian commodities exports is predicted to jump to 7%, to $150 billion, in 2007-08. It is not only minerals and energy exports driving the boom: the farming sector is predicted to produce a bumper crop as it recovers from the drought.

– Amanda Gome

Economy roundup

New home sales declined by 4.4% in May, according to Housing Industry Association data released today.

A crisis in affordability has pushed sales of new homes down despite strong economic conditions around the country, HIA chief economist Harley Dale says.

The big drop was in sales of new detached homes, which fell 6.9%. By contrast, sales of new units and apartments, which are generally cheaper than homes, increased by 14%.

China’s central bank Governor Zhou Xiaochuan has sent jitters through the country’s stockmarkets by saying they may be overvalued, Bloomberg reports.

“We’re not sure whether there’s a clear bubble, but we worry,” Zhou says, adding that “we don’t rule out further rate increases if necessary.”

At 12.15pm the S&P/ASX 200 is down 0.3% to 6313.1 and the Australian dollar is trading at US84.68c, down on the US85.01c high achieved overnight.

– Mike Preston

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