The Australian

Australia learns, as Dutch did in 1960s, that resource boom has downside
BY: MICHAEL CASEY From: MarketWatch May 17, 2012 11:53AM

BEWARE Dutch disease. No, this is not a travel warning for tourists visiting the seedier parts of Amsterdam. It’s a history lesson about how commodities booms can become double-edged swords for resource-rich countries, a lesson that Australia is now learning as a strong Australian dollar becomes an unbearable burden for much of its economy.

Coined after a surging Dutch guilder eviscerated Holland’s manufacturing industry in the aftermath a giant natural gas discovery in 1959, ‘Dutch Disease’ refers to the loss of competitiveness that labor-intensive industries suffer when a currency appreciates on the back of rapid growth in a capital-intensive resource sector.

Companies that extract and market the commodity do well, but the rising currency also causes downstream manufacturing exporters to lose market share to foreign competitors while foreign investment inflows associated with the boom push local asset and consumer prices ever higher. The result is both employment and inflation-adjusted wages often fall for the local industries that provide most of a country’s jobs.

The Australian strain of this disease stems from China’s surging demand for the raw materials – notably, iron ore, coal and natural gas – needed to fuel a construction-led economic expansion. The incessant inflow of money pushed the Australian dollar above $US1.00 in November 2010 and onward to a 28-year high of $US1.1083 in July last year, a level that it nearly reached again earlier this year. It has been a remarkable turnaround for a currency that plunged to $US0.60 in October 2008.

On Monday, the Aussie dipped back below parity for first time this year. It was the climax of a five-cent decline that was triggered on May 1 by the Reserve Bank of Australia’s half-point rate cut and was aided by poor Australian housing data, a deteriorating outlook for Chinese growth, and a downturn in general risk appetite among global investors.

But although a number of banks downgraded their year-end forecasts, most are still predicting year-end numbers around $US0.97. That’s hardly heralding a collapse and it certainly won’t do much to help the victims of what locals refer to as the “two-speed economy”.

With unemployment dropping to 4.9 per cent at its last readout, Australia’s overall labor market is enviably healthy. But the headline disguises a harsher reality. The job gains are concentrated in mining and drilling operations in remote parts of the country, places that will only attract a certain breed of worker.

While high school graduates are earning annual salaries of up to $160,000 for “fly-in-fly-out” shift work in Western Australia’s open-pit iron ore mines, the wages of Aussie teachers, factory workers and office staff have stagnated as their cost of living soars.

Australian welfare agencies now talk of an emerging “working poor”, single-breadwinner families that can’t earn enough to make ends meet. Yet among more well-to-do mainstream workers, too, the income gap is breeding resentment.

With a combined income of $114,000, schoolteachers Kelly and Anthony Curran of Perth, Western Australia, feel that their family of four is now trapped in the run-down two-bedroom cottage they purchased nine years ago. Soaring construction costs prevent them from expanding it as they’d planned, while the prices of alternative homes in their neighborhood are now far beyond their budget.

Ms Curran, who mostly works as a part-time teacher, talks resentfully of workers occasionally earning as much as $600 an hour in one-off temp jobs when mining and natural gas projects are desperate for workers. “I might get around $50 an hour teaching, and I have studied for an equivalent of eight years full-time,” she said.

Such sentiments shape Australian politics and the anti-mining rhetoric often heard from Labor government ministers. Yet the government is withholding spending that could help teachers like Ms Curran by insisting on meeting a longstanding promise to achieve a fiscal surplus even though its debt levels are among the lowest in the world.

Meanwhile, the one measure that could have helped to re-balance the two-speed economy – a mining tax proposed in 2010 – was significantly watered down in response to pushback from the industry. Faced with few other options for stimulus, Prime Minister Julia Gillard has instead called on the RBA to cut rates.

Though doggedly independent, the RBA has at least given the politicians a bone, cutting rates by 100 basis points since November. Nonetheless, at 3.75% the central bank’s benchmark rate still compares favorably to the near-zero rates paid on U.S. dollars and yen, and that will continue to underpin the currency.

The RBA seems resigned to the reality of Dutch Disease. In a speech on Monday, deputy governor Philip Lowe noted that “structural changes” are creating “a sense of unease for many in the community…, particularly amongst those who are not benefiting directly from the mining boom”. But citing a slew of healthy macroeconomic indicators, he also said “it is likely that we will continue to have a fairly high exchange rate for some time”.

If so, Australians will also have to live with their two-speed economy for some time.

The Age

Philip Hopkins
May 16, 2012

THE next development cycle, expected to start this year with some completed projects, is likely to make the Melbourne fringe office market the biggest non-CBD office market in the country, according to Savills Australia’s latest research.

The Melbourne CBD Fringe Office Market Spotlight: March identified more than 50 development sites in and around the CBD – including defunct residential development sites, mixed-use and substantial commercial development opportunities – that could house more than 1 million square metres. Docklands in particular, and Southbank would be key beneficiaries.

Report author, Savills national head of research Tony Crabb, said the capacity of Southbank and Docklands to cater for larger scale developments would continue to attract tenants who needed whole buildings, contiguous full floors and large floor plates.

The two precincts’ advantages included transport, proximity to the CBD, competitive rents and sites that allowed new concepts in building design, he said.

The last construction cycle, which was cut short by the global credit crisis, added 548,000 sq m to Southbank/Docklands and the St Kilda Road precinct. Mr Crabb said this was the largest office construction cycle since the late 1980s, when more than 1 million square metres was under construction in the CBD.

The report also found 317,102 sq m of space was leased over the year to December 2011 in central Melbourne (CBD, Southbank and Docklands) from leases greater than 500 sq m

THE Docklands could soon rival Melbourne’s historical office hot spot, Collins Street, particularly with small businesses searching for modern strata space in new buildings, according to a new report by Urbis.
Roger Scrivener, Urbis director and author of the Melbourne Strata Office Market report, said there were about 1800 strata units in the Melbourne CBD, with an average sales turnover of almost 130 units per annum – about 7 per cent of total stock.
Before 2000, strata units were created from the conversion of older, conventional office buildings, but since 2000, about 500 strata units had been supplied in purpose-built offices. These included Aquavista in Docklands, 757 Bourke Street in Docklands, 2 Queen Street, Life Lab in Docklands and 373 King Street. More than 65 per cent of strata offices in the CBD were built before 1980.
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The old conversions often led to poor-quality natural light, services and finishes, the report said. The first purpose-built strata offices appeared in the late 1980s, but still on a small scale.
But as the average size of standard office buildings increased, with average floorplates bigger than 1500-2000 sq m, small tenancy areas of 50 sq m to 100 sq m were harder to create.
”As a result, to cater for the accommodation of small businesses, the development of purpose-built strata office facilities has now become economically feasible,” the report said. In this context, Docklands was now more in play. The Docklands now accounts for 12.6 per cent, or 517,000 sq m, of the total CBD stock of about 4.1 million sq m, according to the Property Council of Australia.
”The Docklands precinct has emerged as the new force for office and other development in the Melbourne CBD,” Mr Scrivener said. The report’s key findings included:
■ Eleven office buildings being built and another committed to, account for 305,000 sq m of new supply, with 82 per cent, or 247,500 sq m, in Docklands.
■ In less than 10 years, more than 500,000 sq m of office space has been created within Docklands, with a further 700,000 sq m likely during the next 10 years.
■ Three of the five new strata CBD offices since 2007 have been in Docklands, although none has a Collins Street address.
■ Many of the strata units sold recently were by a 12-month vendor leaseback, often creating an unrealistic expectation of leasing demand from investors.
■ Rents in strata office suites are generally about 10 per cent above standard offices in similar locations, but lease terms are shorter at two-to-four years.
■ Investment yields for office suites have softened since 2008, with yields for prime strata office suites now 6.5-7 per cent, and secondary yields 7-8 per cent.
Based on current construction and future proposals, Mr Scrivener said, most new office space in the Melbourne CBD over the next five-10 years would be within the Victoria Harbour, Batman’s Hill and Stadium sub-precincts of the Docklands. However, to date, only one strata office project was being built in Docklands: Lifestyle Working Collins Street at 838 Collins Street.
Daniel Wolman, Colliers International executive, CBD sales, said demand for Lifestyle Working had been strong, with Docklands having the potential to become a hot spot.
”The continued strong growth in white-collar employment that we are seeing in Victoria creates employment opportunities not only for medium and large organisations but also for small, fledgling businesses,” he said.
Colliers managing director, investment services, John Marasco, said Victoria Harbour, in particular, was now regarded as a legitimate extension of the CBD as a place to live and work.
Mr Marasco said the Melbourne CBD office market overall was overcoming hindrances. The inner-city residential boom had removed potential office sites thus restricting supply, while tight controls on credit had ensured virtually all new office development was pre-committed by more than 70 per cent, avoiding speculative development.
”So, while significant new supply and weaker economic conditions over the 2012-13 period are likely to produce higher vacancies and subdued rental and capital value growth, we see stronger conditions returning from 2014 on,” he said.

Read more: http://www.theage.com.au/business/property/docklands-to-rival-collins-st-20120515-1yox0.html#ixzz1v53SQA6e

Angus Thompson From: Herald Sun May 16, 2012 12:00AM

SAVVY homebuyers and investors could be landing a property for a bargain right in the centre of the city.

Melbourne, North Melbourne and Carlton are on a list of inner city suburbs in Australia where units can still be bought for less than $300,000, according to a new report.

The inaugural Inner City Steals report by Smart Property Investment has found 20 suburbs within 5km of Australia’s capital city CBDs where buyers can still find an apartment for under $300,000.

The findings defy the perception that affordable homes are being barged out of inner city markets.

The survey shows that 25 per cent of units in those suburbs sell for $300,000 or less.

But RP Data senior research analyst Dr Andrew Wilson said he was worried there was an oversupply of apartments in Melbourne.

“Melbourne is a fascinating market for units at the moment,” Dr Wilson said.

“There have been something like 25,000 new high rise apartments approved over the last 18 months and most of these are in the CBD.”

Experts said the potential surplus of apartments could impair capital growth and rental returns for investors.

The Age

May 16, 2012 – 9:44AM

Building products group CSR fears Australia’s housing construction industry will remain in the doldrums in the year ahead.
The company made the comments on Wednesday as it announced its net profit fell to $76.3 million in the year to March 31 from $503.4 million the previous year.
Trading revenue fell to $1.8 billion from $1.9 billion.
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CSR estimated total housing starts in Australia would fall to about 140,000 in the year to March 2013, down from the 148,300 in 2012.
“Excluding the global financial crisis and the introduction of the GST, this represents the lowest level of housing activity in the past 15 years,” CSR said in a statement.
CSR said it expects total private detached commencements to remain steady around 90,000, with multi-residential starts expected to fall by about 10 per cent to 50,000.

However things should be better across the Tasman, with dwelling starts in New Zealand expected to improve by about 15-20 per cent for the year, albeit from a low base.

‘‘CSR expects the market for housing alterations and additions to improve slightly and anticipates that the value of non-residential construction work done in Australia will be steady on the previous year,’’ the company said.
CSR also expects its building products and Viridian businesses, to benefit from the restructuring implemented over the past year.
However its GAF aluminium business is likely to be affected by foreign currency movements.Lower spot aluminium prices in US dollars combined with the high Australian dollar mean the business has begun the year with a significantly lower net hedged position than previous years.

CSR said GAF has about 14 per cent of its net aluminium exposure hedged at $3,077 a tonne compared to about $2,010 a tonne at April 30, 2012.
‘‘GAF will add hedging as metal and currency markets permit, however, given the current net hedged position, earnings for YEM13 (year ending March 2013) will be more exposed to the A$ spot price of aluminium than in previous years,’’ CSR said.

The Age

Peter Martin
May 16, 2012

TREASURY boss Martin Parkinson says the economy will survive one of the tightest budgets in years in part because its economic effects are milder than is widely believed.
In answers to questions at the annual Australian Business Economists lunch in Sydney, Dr Parkinson said taking the budget from a $44.4 billion deficit to a $1.5 billion surplus amounted to a fiscal contraction of 3.1 per cent of GDP.
But much of the money saved would not have been spent in Australia anyway. It would have gone overseas on defence equipment and foreign aid. And other decisions in the budget moved spending and concessions from people not likely to spend, to people keener to consume.

”We haven’t modelled this formally, so there’s no point looking for it under freedom of information,” Dr Parkinson said. ”But the macroeconomic effect of the fiscal contraction is probably less than a per cent of GDP.
”That’s a ballpark figure – 1 per cent of GDP. The fiscal consolidation is 3.1 per cent of GDP, the economic contraction is 1 per cent.
”This does not mean the fiscal consolidation is not real. The outlays to GDP share will step below 24 per cent and stay there for the next four years. It will be the longest period of outlays below 24 per cent since the late 1970s and early 1980s.”
Responding to commentators who have argued there is no great need for an urgent return to surplus and that the urgency is ”political”, Dr Parkinson said if the time was not right now when unemployment was low and growth was moving back to trend it might never be right.
”It is surprisingly under-appreciated that fiscal consolidation in Australia is happening in a far healthier environment than the circumstances facing many other advanced economies. With substantial risks remaining in the global economic environment, it is critical that we move now to recharge the fiscal batteries while circumstances remain favourable.”
Company tax revenue, capital gains tax revenue, and goods and services tax revenue had all been less than expected, for reasons not fully understood. An early return to surplus would help address early one of the key challenges facing government – the gap between the expectations of government and the public’s willingness to pay to meet those expectations.
For the foreseeable future, all levels of government faced ”razor-thin surpluses at best in the absence of conscious decisions to raise additional revenue or cut outlays”.
Asked whether achieving a forecast surplus by shifting spending from one year to another was best practice, Dr Parkinson said every budget saw ”money moved across financial years”.
”It happens all the time, always does. The idea that somehow there is a tablet that says how you must construct your budget, and that the government or the Treasury did something inappropriate this year I completely and utterly reject.”
Dr Parkinson spoke after the release of Reserve Bank minutes showing the board believed conditions in many sectors were ”weak” and ”soft” when it decided to cut its cash rate 0.50 points on May 1. The minutes indicate the board decided on 0.50 points rather than 0.25 partly to counteract rate rises of 0.10 to 0.12 points imposed by the retail banks in February and April.

By: Yolande Chee
Assistant Producer, CNBC Asia
Investors should expect a rally in the Australian stock market, as the Aussie dollar slips below parity against the U.S. dollar, experts told CNBC.

“The Aussie market [.AXJO 4297.00 --- UNCH ] will go wild as the dollar goes down. It’s a huge benefit for most companies,” Campbell Dawson, Portfolio Manager at boutique fund manager Elstree Investment Management told CNBC’s “Cash Flow”.

The persistently high Australian dollar broke parity with the greenback on Monday for the first time in 5 months, on concerns about the slowing Chinese economy after it lowered banks reserve requirement ratio over the weekend. China is Australia’s largest trading partner.

Dawson thinks it won’t take long for the weaker Australian dollar [AUD= 0.997 0.0013 (+0.13%) ] to have a broad-based impact on the economy. “The weaker currency is a blessing. When the dollar goes down, the economy picks up really quickly and will flow through to most aspects of the economy,” he said.

A fallback in the Australian dollar will provide welcome relief for many Australian companies, especially in the manufacturing and tourism sector, analysts say.

George Boubouras, Head of Investment Strategy at UBS Wealth Management thinks the weaker Australian dollar will boost the earnings of non-mining companies. “The (high) Australian dollar has damaged nearly four-fifths of the economy…So a low Australian dollar would help relieve some pressure on company earnings, and stimulate earnings by year end.”

Boubouras adds if the Australian dollar can hold around parity levels, it will be good for companies with non-Australian dollar denominated earnings.

Companies such as buildings material manufacturer James Hardie, media company News Corp and logistics firm Brambles report their earnings in U.S. dollars, and Dawson thinks that these companies will get the quickest boost from the weaker Australian dollar.

“The main companies that will get the first kick (from the weaker Australian dollar) will be the ones with the highest proportion of overseas earnings,” he said.

Another company Boubouras says investors should be looking at is Westfield. He thinks the globally-focused real estate trust will perform well in coming months if the Australian dollar remains low.

Boubouras says WorleyParsons, a services provider to the energy sector is another company set to benefit, as it has been awarded several non-Australian dollar denominated contracts.

Disclosure: Elstree Investment Management holds shares in James Hardie. UBS Wealth Management’s Model Portfolio has shares in Westfield and WorleyParsons.

By CNBC’s Yolande Chee

The Age

May 14, 2012 – 12:25PM

Australia’s major banks have slashed their forecasts for the dollar, with some tipping it will drop to 98 US cents, triggered by further interest rate cuts and reduced government spending.
The lower forecast come as the Aussie dollar fell below parity against the greenback in early afternoon trading (AEST). The dollar dropped as low as 99.96 US cents, the first time in 2012 that it has bought less than $US1.
National Australia Bank has cut its outlook for the Aussie dollar to 98 US cents in September, from an earlier projection of $US1.02, blaming domestic rather than global factors for the lower prediction.

“It is the domestic factors which have changed and are likely to drive the Australian dollar lower quicker than we had previously anticipated,” said NAB currency strategist Emma Lawson.
The central bank is a catalyst for part of the dollar’s fall. Last week, the Reserve Bank lopped 50 basis points off its cash rate – its biggest cut since the depth of the global financial crisis – making the most of weak inflation figures to stoke demand in the sluggish economy.
“The NAB economics team now expect two more 25 basis points easings, and possibly more if the economy further deteriorates,” said NAB’s Ms Lawson.
“The additional easing now expected is driven by the weaker-than-expected economy,” she said, adding that one of the factors is “the contractionary fiscal policy” announced in the federal budget.
Budget drag
Ms Lawson predicts the federal budget, announced last week, will slice one percentage point from the economy’s growth in the year to June 30 as the Gillard government attempts to deliver a surplus for the 2012-13 year.
Australia’s economy grew 2.3 per cent in 2011.
Westpac, too, lowered its target for the Aussie from parity to 98 US cents by the end of September, following the RBA’s rate cuts this month.
Commonwealth Bank also trimmed its forecast to 98 US cents in June, down from a previous forecast of $US1.08.
“The macroeconomic combination of fiscal contraction and interest-rate cuts should lower the exchange rate,” Richard Grace, chief currency strategist and head of international economics at CBA in Sydney.
“Australia’s terms of trade have peaked, and the Aussie should tread a little bit lower as a result of that,” said Mr Grace.
CBA tips the Aussie dollar will be at $US1.05 in December, compared with an earlier projection of $US1.09, the bank said.
The market is currently tipping a 70 per cent chance of a 25 basis point rate cut when the RBA meets in June, with investors tipping an official cash rate of 2.75 per cent in a year’s time, down from 3.75 per cent now.
ANZ Bank sees the Aussie hitting $US1.04 in the current quarter, amid further RBA cuts and a weaker global economic environment.
“Our expectations for further easing in the policy rate have increased,” said ANZ FX strategist Andrew Salter “With a 75 basis points in cuts, tipped taking the cash rate to 3 per cent by year’s end.”
“The near-term risks for the Australian dollar are building. It now seems fairly clear that the vulnerabilities lie to the downside,” he said.
with Bloomberg

The Age

May 14, 2012 – 11:59AM

The federal budget papers are missing an important figure: population growth is on the rise again with a 30 per cent surge in net overseas migration over the seven months to the end of March.
And the absence of that figure or any mention of the population growth outlook for 2012-13 looks more than a little suspicious as stronger population growth makes it more likely that the government’s forecast of trend economic growth is indeed achievable in the year ahead.
While Treasury’s Budget Paper No. 1 spells out any number of assumptions that underpin the headline economic forecasts, population growth – a key cause and effect of economic growth – is missing.

The only oblique reference is to the projections of the 2010 Intergenerational Report, which held that Australia’s population growth was in the process of slowing from its 40-year average of 1.4 per cent.
The most recent demographic release from the Australian Bureau of Statistics is for the year to the end of September, when the population grew by 1.4 per cent with net overseas migration down to 172,500.
Last week’s budget announcements included an increase in the migration “official program” of 5,000 places to 190,000, but that gives little-to-no idea of what’s actually happening with net migration.
For a start, the official program doesn’t count the nearly 14,000 migrants who arrive in the humanitarian program, or a number of smaller categories. Ditto for the 25,000 or so Kiwis who cross the ditch each year, or the international students for whom visa requirements have again been loosened or the sub-section 457 temporary work visas which have been recently embraced and promoted by both sides of politics as Australia struggles to handle its skills shortage.
Uncapped program
The 457 program is uncapped and untargeted – there are as many available as there are employers with positions that meet the scheme’s requirements. With the commodities and capital investment booms still gathering pace, demand for 457 visas is rising strongly.
An important contributor to the fall in Australia’s population growth rate from the peak of 2.2 per cent in 2008 was the slashing of the international student industry as visa requirements were drastically tightened and the stronger dollar made Australian education more expensive. The publicity surrounding attacks on Indian students in Melbourne didn’t help either (and nor will reports of similar threats against Chinese in Sydney).
But now the government is seeking to reinvigorate the education export industry by liberalising tertiary student requirements.
Lagging indicator
While it takes about six months for the ABS to publish its quarterly demographic release – the year to September numbers were released on March 29 – the monthly arrivals and departures figures give an indication of how net overseas migration is rapidly growing again.
Last week’s arrivals and departments release was for March. In the seven months since and including September, the ABS counted 393,540 “permanent and long-term” arrivals and 229,030 departures, indicating a net gain of 164,510 people. For the same period up to March 2011, there were fewer arrivals and more departures, indicating a net gain of 125,810.
That 31 per cent surge in apparent net migration, if it maintained over the whole year and assuming natural population growth is steady, would lift total population growth to 1.6 per cent.
The decline in population growth from the bubble’s peak in 2008 has been an often overlooked factor in businesses feeling times were much harder.
It’s also been part of the reason the unemployment rate hasn’t risen as much as our low rate of employment growth would generally cause.
Dog whistlers
Both the major parties went for the dog whistle during the last election and ran away from championing and explaining our necessary strong migration policy. (The Liberal Party’s policy is to outsource migration to the Productivity Commission while Labor produced a Sustainable Population Strategy without numbers.)
Both sides know Australia needs to maintain a healthy migration program to both handle the skills crisis in the short term and carry some of the tax burden of most the vast majority of the baby boomer demographic bulge being dependent on the pension in retirement. But neither side really wants to take responsibility for it or spell it out.
Leaving such an important assumption or forecast as population growth out of the federal budget process no doubt suits both sides.
Michael Pascoe is a BusinessDay contributing editor.

The Age

May 14, 2012 – 11:36AM

In some rare good news for the struggling housing market, home loans have posted a surprise rise.
Home loans rose 0.3 per cent in March, following a 2.5 per cent decline in February, the Australian Bureau of Statistics said today. Economists polled had predicted a 2 per cent fall for the month.
“It’s an okay result,” said JPMorgan senior economist Ben Jarman. “It’s telling us things weren’t too weak going into the RBA’s 50 basis cut which they delivered a couple weeks ago.”

Growth in Australia’s housing market has slowed over the past year with mixed signals about interest rates and the health of the economy keeping buyer activity subdued.
This month, the Reserve Bank cut interest rates by 50 basis points, with banks passing along the majority of the reduction to borrowers.
Auction clearance rates, a forward looking barometer of the market’s health, perked up over the past weekend. Melbourne’s auction clearance rate was a healthy 63 per cent last weekend, according to the Real Estate Institute of Victoria.
In Sydney it was 61.8 per cent, according to Fairfax-owned Australian Property Monitors.
The ABS said that the value of total dwelling loans fell 0.5 per cent, seasonally adjusted, to $20.18 billion in March.
The number of first home buyer loans as a share of total owner occupied home loans, dropped to 16.4 per cent in March 2012 from 17.2 per cent in February 2012.