Tag Archives: Australia

Insolvencies in Australia Updated: No mines? No growth!

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Update:

The December quarter national accounts were released today, reinforcing the trends noted in the second part of my original post.  Overall the year to December 2011 GDP growth figure was a fairly weak 2.3%.  Here is a good summary taken from an article by economics correspondent, Peter Martin (link):

Economic growth has failed to live up to expectations. Gross domestic product climbed just 0.4 per cent in the December quarter to give Australia annual growth of 2.3 per cent, much weaker than the 2.75 per cent expected by the Reserve Bank.

GDP per person scarcely moved, climbing 0.1 per cent in the quarter to be up 0.9 per cent over the year. Prices were flat, suggesting zero inflation in the quarter.  Almost all the economic growth was concentrated in Australia’s three mining states. Over the past year demand has climbed 11 per cent in Western Australia, 10 per cent in Queensland, and 6 per cent in the Northern Territory.

In NSW it has climbed just 2 per cent, in Victoria 1.6 per cent and in the ACT 2.6 per cent.  In South Australia and Tasmania demand is shrinking, going backwards 0.6 per cent and 0.7 per cent.

……

Today’s figures show the economy growing extremely fast in some states and painfully slow in others, failing to make trend overall.

Original Post:

There was a widely reported publication by Dun and Bradstreet last week of some pretty terrible year on year figures for corporate and personal insolvency.  A link to the report can be found here.

The key findings reported by Dun and Bradstreet were:

  • Nationwide, insolvencies rose 42 per cent year-on-year while the number of new businesses fell 11 per cent over the same period;
  • Small business failures grew 57 per cent over the year among firms with less than five employees and 40 per cent over the year among firms with six to 19 employees;
  • Small business start-ups among firms with less than five employees fell 95 per cent in the year;
  • Failures were most pronounced within the service (up 58%), finance (up 58%) and construction (up 66%) sectors; and
  • There was virtually no start up activity in the manufacturing, service and finance sectors during the December quarter.

I think the increases in insolvencies need to be viewed with a grain of salt – anecdotally, there is evidence that the ATO has been much more active in the last 12 months after a recoveries pause imposed after GFC I.

The other interesting statistics were the almost anemic levels of growth in the non mining states in the same period.  According to statistics quoted in an article by Tim Colebatch last week (link):

  1. In the year to September 2011, domestic demand (that is, spending) grew by 4.2 per cent (faster than GDP, which was at 2.5%, because so much of the new spending was on imports);
  2. Demand grew by 13 per cent in Western Australia and 8.2 per cent in Queensland;
  3. In NSW, Victoria, Tasmania and South Australia,  demand grew by between 0.1 and 1.7 per cent;
  4. On a per capita basis, outside the mining states, spending per head was virtually flat for the year to September 2011.
  5. 77 per cent of the growth in spending over the year was in WA and Queensland, which has 30 per cent of the population. Only 23 per cent was in the rest of Australia, which has 70 per cent of the population.
  6. Since the start of the GFC, Australia has added 92,000 jobs in mining and 62,500 in construction. But by November it had lost 127,000 jobs in manufacturing, almost as many as in the entire 1990-91 recession.

Regards

Mark

What effect are online sales having on retail property?

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Another question that I pondered over fish and chips at the beach these holidays was the impact of online sales on demand for bricks and mortar retail space.  I am a confessed online shopping addict.  With developments like Myer stores projected downsizing and mass closure of Dick Smith Electronics outlets, the outlook for the property sector doesn’t look great.

I received an excellent update (link) on the impact of online retail on the demand for property in the retail sector from James Stewart of Ferrier Hodgson a few weeks ago.  James writes a monthly series of updates (link) which are well worth reading for those of you interested in the retail sector and insolvency issues in that sector.

The update made three interesting points:

  1. the space requirements of retailers will fall, through a combination of greater online sales reducing in store sales, and a deliberate strategy by retailers to downsize stores and offer a greater convenience experience (think Apple stores).
  2. Australia is behind the curve – whilst traditional bricks and mortar American retailers are generating up to 18% of their sales online and growing, in Australia the figures are more like 1%;
  3. as the trend toward multichannel sales takes hold in Australia, landlords will face less demand for retail space and downward pressure on rents.  Almost all landlords will be at risk from this development, although “destination” and best in class properties (Chadstone, Bondi, Chermside) will be insulated.

On a similar note, see a recent post by my colleague Sam Hopper (link) on the impact such developments might be expected to have on rent negotiations and valuations.

Regards

Mark

China and the Australian Insolvency Market (Updated)

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UPDATE:

Some evidence of what a (slight) slowdown in urbanising China might have on the Australian mining sector shows up in BHP’s last half year ended 31 December 2011.  It seems that growth on the already urbanised fringe is slowing, and moving inland (with some exceptions).  The following summary from First Samuel (link) tells the tale:

BHP Billiton’s result for the half year ending 31-Dec-11 was strong in the commodities of thermal coal, petroleum and iron ore – with each showing high revenue and earnings growth. Iron ore production hit a record annualised production rate of  178m tonnes per annum, and now provides BHP with over off of its earnings.

However BHP didn’t quite reach the expected overall profit target (US$10bill+). Cost and pricing pressures impacted  Aluminium’s performance, lower copper grades and industrial activity impacted Base Metals’ (copper) performance, and metallurgical coal was impacted by the Queensland flood legacy and industrial activity.

BHP expressed short term caution, given the uncertainty created by the situation in Europe. However, it highlighted  that the structural drivers of industrialisation and urbanisation in the developing world underpin commodity demand in the medium to longer term.

Source - BHP

BHP’s chart shows that the urbanisation of  manufacturing capabilities that exist in coastal provinces are moving inland, extending high GDP growth across more of the country.

At some point there will be no territory left  to sustain the pace of  urbanisation and we will have to hope India or Africa (where many low wage manufacturing jobs are now going) takes up the slack.

ORIGINAL ARTICLE:

Over summer at the beach I had the opportunity to read some interesting material on the Chinese economy.

The Australian economy driven in large part by demand for our raw materials by China.  China is now our largest trading partner and it is the first time that the position has been held by a non western, let alone a non democratic, nation.  The fact that China remains a dictatorship presents a greater degree of risk to us that our reliance on fellow minded nations in the past, in Britain and the USA.

I have sometimes wondered (as a insolvency practitioner) how likely it is for the China boom to continue, at least at a pace sufficient to keep resource prices sky-high, and the Australian economy afloat.

One of the more extreme predictions I read was in “The Coming Collapse of China”.   The author, Gordon Chang, sets out a long lists of reasons why the economy in China is in trouble:

  1. The current leadership has backed away from economically progressive policies;
  2. The GFC has killed growth in China’s export markets;
  3. The one child policy will from 2014 result in a falling absolute working age population, undermining China’s chief advantage of low priced  labour;
  4. Internal inflation reflected in asset bubbles, high price inflation following the GFC stimulus package in China.

Chang predicts a slowdown (Japan style) or crash will follow.  But when and how?  This is what I found interesting:

Today, social change in China is accelerating. The problem for the country’s ruling party is that, although Chinese people generally do not have revolutionary intentions, their acts of social disruption can have revolutionary implications because they are occurring at an extraordinarily sensitive time. In short, China is much too dynamic and volatile for the Communist Party’s leaders to hang on. In some location next year, whether a small village or great city, an incident will get out of control and spread fast. Because people across the country share the same thoughts, we should not be surprised they will act in the same way. We have already seen the Chinese people act in unison: In June 1989, well before the advent of social media, there were protests in roughly 370 cities across China, without national ringleaders.

This phenomenon, which has swept North Africa and the Middle East this year, tells us that the nature of political change around the world is itself changing, destabilizing even the most secure-looking authoritarian governments. China is by no means immune to this wave of popular uprising, as Beijing’s overreaction to the so-called “Jasmine” protests this spring indicates. The Communist Party, once the beneficiary of global trends, is now the victim of them.

So will China collapse? Weak governments can remain in place a long time. Political scientists, who like to bring order to the inexplicable, say that a host of factors are required for regime collapse and that China is missing the two most important of them: a divided government and a strong opposition.

At a time when crucial challenges mount, the Communist Party is beginning a multi-year political transition and therefore ill-prepared for the problems it faces. There are already visible splits among Party elites, and the leadership’s sluggish response in recent months — in marked contrast to its lightning-fast reaction in 2008 to economic troubles abroad — indicates that the decision-making process in Beijing is deteriorating. So check the box on divided government.

And as for the existence of an opposition, the Soviet Union fell without much of one. In our substantially more volatile age, the Chinese government could dissolve like the autocracies in Tunisia and Egypt. As evident in this month’s “open revolt” in the village of Wukan in Guangdong province, people can organize themselves quickly — as they have so many times since the end of the 1980s. In any event, a well-oiled machine is no longer needed to bring down a regime in this age of leaderless revolution.

Paul Wolfowitz, former head of the World Bank, architect of US policy in the second Iraq war and expert on Asia, gave an interesting speech on the same topic (link to the video of his speech) last September in Australia.  He compares the situation in 2011 to the world economy in 1900 and identifies a challenge – that is ensuring China can be integrated into the world economy as an emerging great power without sparking upheaval or war, as Germany and Japan did.

Regards

Mark