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Wednesday, 27 March 2013 10:50

China - a controlled slowdown, not a train wreck

Written by

The most important influence on the Australian economy is arguably China, given our vast exports to China.

The Chinese authorities have successfully cooled the economy down, without trashing it as can be seen by the following charts.

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Tuesday, 05 March 2013 18:41

RBA keeps rates on hold in March - next move likely lower

Written by

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As expected Reserve Bank Board holds rates steady at March meeting

As we expected the Board of the Reserve Bank decided to hold the cash rate
steady at 3% following today's Board meeting.

There were minimal changes in the wording of the Governor's statement from
the statement issued on February 5 following that "no change" decision.

Of most importance was retaining the term "the inflation outlook, as
assessed at present, would afford scope to ease policy further should that
be necessary to support demand". Maintaining that statement indicates that
the Board retains an easing bias and future decisions will be impacted by
the growth profile.

By far the most important data release since the last meeting was the
Capital Expenditure survey for the December quarter. This survey provided
the first estimate of investment plans for the 2013-14 fiscal year. It also
provided the fifth updated estimate for investment in 2012-13. The news on
2012-13 was quite poor with substantial downward revisions to investment
plans. However, partly because the 2012-13 number was so low it was not too
big a stretch for the 2013-14 investment plans to show a solid increase.
Indeed by our calculations those plans indicated an 11% boost in investment
in 2013-14. That evidence is likely to have been a key factor in the Bank's
decision to hold rates steady. Indeed, while investment outside mining
continued to be assessed as "relatively subdued" the Governor did qualify
that with "recent data suggest some prospect of a modest increase during
the next financial year". Hence from the Bank's perspective progress in
rebalancing growth towards the non-mining sectors appeared to be underway.

Another aspect of the Capex survey indicated that the peak in resource
investment might be further out than previously assessed. However, there is
considerable uncertainty around those estimates and the Bank, prudently,
retained its general assessment that "the peak in resource investment is
approaching".

The themes that have figured consistently in previous statements were
repeated today – moderate growth in private consumption; near term outlook
for non residential building subdued; exports strengthening; public
spending constrained; inflation consistent with the medium term target; and
low demand for credit.

The wording on the housing market changed. Whereas in February it was
described as: "prospective improvement in dwelling investment", it is now
described as: "appears to be slowly increasing". This somewhat more
positive assessment is the direct result of a modest 2.1% reported increase
in housing construction for the December quarter. Higher dwelling prices
and rental yields are also noted.

The conviction that inflation will remain consistent with the medium term
target is given more support in this statement. Whereas the February
statement predicted that a soft labour market would be working to contain
pressures on labour costs this statement notes that this result has indeed
been "confirmed in the most recent data". In the February statement the
Bank raised the prospect of businesses focussing on lifting efficiency to
contain wage pressures and this sentiment is retained.

The description of the international situation is largely unchanged
although the Governor appears to be a little more confidence around
downside risks. Compare "downside risks appear to have abated, for the
moment at least" (February) with "downside risks appear to have lessened in
recent months".

The description of financial markets includes a more upbeat assessment of
the sharemarket, "share prices have risen substantially from their low
points". However, the Bank continues to point out that financial markets
remain vulnerable, adding "as seen most recently in Europe".

The key theme is repeated in this statement, "the full impact of this
[easing in monetary policy] will still take more time to become apparent,
there are signs that the easier conditions are having some of the expected
effects".

Despite the recent fall in the AUD (substantially more in USD terms than in
TWI terms) the Bank continues to point out that the exchange rate remains
higher than might have been expected.

Conclusion – expect the next rate cut by June.
This statement is clearly structured to signal that the Bank retains its
easing bias but will be patient before cutting rates further.

We believe that there will be another cut in this cycle but not until
around June. Forces that are most likely to highlight the need for lower
rates will be around: an ongoing softening in the labour market; contained
price and wage pressures; a disappointing response from business in terms
of investment; and a housing recovery that, while quite vibrant in Sydney,
will not be replicated around the country. We also expect that the
Australian dollar will be drifting higher through to mid year particularly
as foreign investors rebalance their appetite back towards high yielding
Australian assets.

Bill Evans
Chief Economist
Westpac Institutional Bank

 

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

 

 

Wednesday, 24 October 2012 10:20

Health/Reality Check on the Australian Economy

Written by

David Murray, the former CEO of the Commonwealth Bank and former head of the Future Fund spoke recently to the 7.30 Report.

He spoke about the current path of the Australian economy and whether it is sustainable.

[youtube]http://www.youtube.com/watch?v=7-U2f5ttNdA[/youtube]

 

Wednesday, 12 September 2012 16:43

Consumer Sentiment rises slightly but remains weak

Written by

•The Westpac Melbourne Institute Index of Consumer Sentiment rose by 1.6% in September from 96.6 in August to 98.2 in September

This is the seventh consecutive month that the Index has been below 100. Apart from the 2008/09 period when the Index held below 100 for 16 consecutive months this represents the longest run of consecutive ‘sub 100’ prints since the early 1990s. Furthermore, there have only been two months in the last 15 when the Index has printed above 100.

The consumer is clearly stuck in an extended ‘cautiously pessimistic’ phase. In September last year the Index printed 96.9 so it has only increased by 1.3% over the whole year. That is despite 1.25% of rate cuts from the Reserve Bank; a more or less steady unemployment rate which is close to full employment; and some recent positive news around the threatening European situation.

This does not bode well for consumer spending and is consistent with the slowdown in consumer spending indicated by the June quarter national accounts. Although this followed a strong March quarter rise, the softening has come despite major policy boosts to household incomes including $1.9bn in fiscal handouts. With a sharp fall in July retail sales confirming this boost is now reversing, underlying momentum appears to be soft, in line with the consistently downbeat signal from the Consumer Sentiment Index.

Media coverage is often a major factor shaping respondents’ confidence including how they assess their own financial position and how they evaluate macro issues.

In the September report we receive an update on the news items which are capturing the attention of consumers and whether these were favourable or unfavourable. It shows the dominant news in September was around ‘economic conditions’ with 47% recalling news on this issue. Next was ‘budget and taxation’ (39.8% recall); international conditions (25.5% recall); and employment/wages (20.6% recall). Other topics registering lower recall include covered interest rates; inflation; politics and the Australian dollar.

Since June, the overall sentiment Index has increased by a modest 2.7%. Respondents generally recalled slightly less unfavourable news on international conditions although these items were still overwhelmingly negative. Other news was viewed as even more unfavourable than in June.

Four of the five components of the Index increased with the sub- indexes tracking views on “family finances compared to a year ago” up 0.3%; “family finances over the next 12 months” up 4.8%; “economic conditions over the next 12 months” up 0.6% and “economic conditions over the next 5 years” up 3.4%. The sub- index tracking views on “whether it is a good time to buy a major household item” fell by 0.4%.

By June this year we were particularly concerned by readings on “family finances over the next 12 months” which was printing at a level around the low-point of the 2008-09 period. Since thenwe have seen an encouraging improvement in this component which has increased by 11.4%. However it is still at a historically low level. For example the average print of that component during that 2008/09 period when the Index registered 16 consecutive months below 100 was 105.2 – today’s print of 96.2 is still well below that average. We can only conclude that respondents remain concerned about their finances despite the recent rally.

This survey also provides a quarterly update on respondents’ savings preferences. There was a sharp increase in the proportion of those respondents who assess bank deposits to be the wisest place for savings, with that proportion increasing from 32.6%

in June to 39.0% in September. That proportion is the highest proportion since December 1974 and comfortably exceeds the peak proportion during the 2008/09 period of 36.9%. For this survey the 6.4ppt increase in preference for bank deposits was at the expense of real estate which fell from 25.0% in June to 19.8% in September. The proportion of respondents favouring shares stayed near record lows at 5.5%, while the proportion opting for ‘pay down debt’ was steady at 20.4%.

If we compare the total proportion of respondents who prefer conservative savings options, covered by bank and other forms of deposits in conjunction with “pay down debt” the current proportion registers 63.5% of respondents. That compares with 64.2% in December 2008 when we were at the height of risk aversion during the Global Financial Crisis. In short, respondents are exhibiting a similar level of risk aversion in terms of their savings preferences as we saw in 2008.

The Reserve Bank Board next meets on October 2. Our forecast has been and remains that the Bank will decide to cut the official cash rate by 50bps over two meetings by year’s end. The case for lower rates is strong. Inflation remains well contained and the Bank’s own forecast has inflation remaining consistent with the target over the next one to two years. Interest rates are only slightly below neutral levels. The June quarter national accounts showed that consumer spending is slowing and investment in residential construction and plant and equipment has been contracting for the last few quarters. Despite a near 10% fall in the terms of trade the Australian dollar has failed to perform its usual ‘shock absorber’ role. Fiscal policy at both Federal and

state levels is tightening. Both consumer and business confidence are soft. From a domestic perspective only the fall in the unemployment rate and the ongoing surge in mining investment counter the case for lower rates. However, the fall in the unemployment rate has been due to discouraged workers leaving the workforce while the medium term outlook for the mining investment has recently been revised down by some mining companies.

In short, we think the case for lower rates has already been made and there must be a reasonable chance that the Bank will decide to move in October. However, central banks are conservative so a November ‘call’ for the first move looks to be more prudent.

Bill Evans, Chief Economist

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Wednesday, 03 October 2012 11:00

Is the mining boom over and would it be so bad if it is?

Written by

The miners are big enough to play dirty

Key points

  • The mining investment boom still has another year or two to go but its peak is starting to come into sight and the best has probably been seen in terms of commodity prices.
  • While there is the risk of a timing mismatch around the end of the investment boom in 2014 and as other sectors take over in driving Australian economic growth, the eventual end of the mining investment boom should lead to more balanced Australian growth.
  • The eventual slowing of the mining boom should mean lower interest and term deposit rates, the best is over for the Australian dollar (A$) and a more balanced share market.

Introduction

Recent weeks has seen much debate and consternation in Australia as to whether the mining boom that has supposedly propelled the economy for the last decade is over. This followed the cancellation or delay of various resource investment projects including the massive Olympic Dam expansion and a fall in commodity prices over the last year.
But is it really over? And would it really be the disaster for Australia that many fear? After all, we have had years of hearing about the two-speed economy where the less resource-rich south eastern states were being left behind and it was said that the people of western Sydney were paying the price (via higher-than-otherwise interest rates and job losses) for the boom in Western Australia, so many Australians might be forgiven for thinking good riddance.

Semantics and confusion

Much of the debate about whether the mining boom is over has been characterised by confusion as to what is being referred to with some focusing on commodity prices, others on mining investment projects and others saying that technically it hasn’t even begun until mining and energy exports pick up. In broad terms the mining boom that has gripped Australia for the last decade likely has three stages.

The first stage, or Mining Boom I (MB I), began last decade and saw surging resource commodity prices driven by industrialisation in China. This resulted in a rise in Australia’s terms of trade to near record levels (see the next chart). This phase was initially good for
Australia last decade as it seemingly benefited everyone. Resource companies got paid more for what they produced, their profits surged, they employed more people, and they paid more taxes, which led to budget surpluses and allowed annual tax cuts. They paid more dividends and their share prices went up. The A$ rose but not to levels that caused huge problems for the rest of the economy. So, not only did the resources companies benefit but there was a big trickle down effect to almost everyone else. As a result the economy performed very strongly and unemployment fell below 4%.

 

The second stage, or Mining Boom II (MB II), has been characterised by a surge in mining and energy investment. This has been underway for the last few years and will take mining investment from around 4% of gross domestic product (GDP) in 2010 up to around 9% in 2013, contributing around 2 percentage points to GDP growth in each of 2011-12 and 2012-13.

 

The third stage, or Mining Boom III (MB III), will presumably come when resource exports surge on the back of all the investment.  So where are we now? In terms of the commodity price surge that characterised MB I, it’s likely that we have either seen the peak or the best is over with more constrained gains ahead:

  • Firstly, the pattern for raw material prices over the past century or so has seen roughly a 10-year secular or long-term upswing followed by a 10- to 20-year secular bear market, which can sometimes just be a move to the side.

 

The upswing is normally driven by a surge in global demand for commodities after a period of mining underinvestment. The downswings come when the pace of demand slows but the supply of commodities picks up in lagged response to the price upswing. After a 12-year bull run since 2000 this pattern would suggest that the commodity price boom may be at or near its end.

  • Global growth appears to have entered a constrained patch. Excessive debt levels in the US, Europe and Japan have constrained growth, while potential growth in China, India and Brazil looks like being 1 or 2 percentage points lower than was the case before the global financial crisis. This means slower growth in commodity demand going forward.
  • The supply of raw materials is likely to surge in the decade ahead in response to increased investment.
  • Finally, the surge in commodity prices since 2000 was given a lift by a downtrend in the US dollar from 2002 as commodity prices are mostly priced in US dollars. This has now likely largely run its course.

Taken together, this would suggest that the best of the commodity price surge since 2000, or MB I, is behind us. There are two qualifi cations though. First, after the recent short-term cyclical slump there will still be a rebound, probably into next year as global growth picks up a bit. Second, it’s way too premature to say that the surge in demand in the emerging world is over - China and India are still very poor countries with per capita income of just US$8,400 and US$3,700 respectively compared to US$40,000 in Australia suggesting plenty of catch-up potential ahead and related commodity demand.

In terms of MB II, while the cancellation of Olympic Dam and other marginal projects indicates that projects under consideration have peaked, this does not mean the mining investment boom is over. In fact it probably has another one to two years to run. Based on active projects yet to be completed there is a pipeline of around A$270 billion of work yet to be completed. Iron ore related capital spending (on mines and infrastructure) are likely to peak this fi nancial year and coal and liquid natural gas related investment is likely to peak in 2014-15, suggesting a peak in aggregate around 2014.

In other words, the boom in mining investment has 18 months or so to run before it peaks and starts to subside back to more normal levels. But what can be said though, is with the cancellation of marginal projects that were in the preliminary stage, the end is coming into sight.

Finally, MB III or the pick-up in export volumes flowing from the surge in mining investment in iron ore, coal and liquefied natural gas will start to get underway around 2014-15.

Heading towards a more balanced economy

Talk of the end of the mining boom has created a bit of nervousness regarding the outlook for Australia. However, the reality is that the current stage of the mining boom focused on
mining investment has not been unambiguously good for the economy and its inevitable end should hopefully see Australia return to a more balanced economy.

It was always thought that after two or three years the surge in mining investment would settle back down as projects ran their course. Trying to do a whole lot of projects in a relatively short space of time was always fraught with the threat of excessive cost
pressures and an excessive surge in supply. We are now seeing market forces kicking in to rationalise resource projects and so the more marginal projects are being delayed. This is a good thing as it will reduce cost pressures, leave work for the future and reduce the
size of the commodity supply surge over the decade ahead thereby helping avoid a crash in commodity prices.

The cooling down of the mining investment boom should help lead to a more balanced economy. MB II has not been good for big parts of Australia. With roughly 2 percentage points of growth coming from mining investment alone it has really put a squeeze on the
rest of the economy. Housing and non-residential construction, retailing, manufacturing and tourism have all suffered under the weight of higher-than-otherwise interest rates and a surge in the A$ to 30-year highs.

What’s more the boom in mining investment has meant that the Federal Government has not seen the tax revenue surge it got last decade, so last decade’s regular tax cuts have not been possible and this has weighed on household income.
This is all evident in the Australian share market which has underperformed global shares since late 2009, with the resource sector being the worst performer over the last year as resource sector profits have fallen 15% or so.

So, the end of the mining investment boom, to the extent that it takes pressure off interest rates and the A$, should enable the parts of the economy that have been under the screw for the last few years to rebound, leading to more balanced growth. This is also likely to be augmented by a pick-up in resource export volumes equal to around 1% of GDP from around 2014-15 according to the Bureau of Resource and Energy Economics.

Of course a risk is of a timing mismatch around 2014 as investment slows down with other sectors taking a while to pick up. To guard against this the Reserve Bank will clearly need to stand ready to respond with lower interest rates.

The bottom line is that the end of the mining investment boom in a year or two won’t necessarily be bad for the Australian economy and will likely see a return to more balanced growth.

Concluding comments
It’s premature to call the end of the mining boom just yet. The peak in mining investment probably won’t be seen until 2014 and thereafter actual mining production and hence exports will start to pick up. However, the best has probably been seen in terms of commodity price gains and the end of the investment boom is starting to come into sight.
While there may be the risk of slower growth as the Australian economy shifts gears away from mining investment in 2014 to mining exports, construction and other parts of the economy that have been subdued, the end of the investment boom should lead to a more balanced economy reflecting less pressure on the interest rates and the A$.
For investors there are several implications including:

  • Ongoing pressure for lower interest rates as the risk of an overheating economy subsides. This means that term deposit rates are likely to fall further in the years ahead.
  • The best has likely been seen for the A$, implying less need to hedge global shares back to Australian dollars.
  • Resources shares are currently cheap and should experience a cyclical rebound when confidence in global growth improves.
  • However, beyond a short-term bounce it’s likely that the cooling of the mining boom will allow a return to a more balanced share market with domestic cyclicals likely to perform better.

This material has been provided for general information purposes and must not be construed as investment advice. This material has been prepared without taking into account the investment objectives, financial situation or particular needs of any particular person. Investors should consider obtaining professional investment advice tailored to their specific circumstances prior to making any investment decisions and should read the relevant Product Disclosure Statement.

Thursday, 26 July 2012 11:31

Australian Official Interest Rates - Further to fall

Written by

Westpac Consumer Confidence index was released in July showing an improvement in Consumer Sentiment.

Finally we have some evidence that the Reserve Bank’s policy of cutting the official cash rate by 1.25% between November last year and June this year is starting to gain more positive traction with households.

However, this result is far from convincing and should not be interpreted that we can expect confidence to steadily return to more normal levels over the months ahead.

The Index is now 2% above its level in October last year prior to the beginning of the rate cut cycle. However it is still 4.1% below the reading in November last year when households responded positively to the first rate cut in November. Following that initial
positive response in November concerns around the international and domestic economic outlooks offset any positive impact of the rate cut in December. These ongoing concerns, particularly around the international economic outlook, continued to mute the impact of subsequent rate cuts in May and June. In fact, despite the cumulative cuts of 125bps we still have the situation that pessimists slightly outnumber optimists.

Over the month, households were probably buoyed considerably by the result from the Greek elections and the positive reception to the latest European leaders’ summit , averting, at least for the time being, a new crisis in Europe.

While the Reserve Bank did not cut interest rates further there was a strong 5.5% jump in the confidence of those respondents who hold a mortgage.

There was also some positive news around the domestic economy.Petrol prices are down by 7% since the last survey and have now fallen 13% since May. The Australian dollar rallied from 98¢ to 102¢ versus the US dollar, and the share market rose 2.7%.

All components of the Index increased in July. The sub-indexes tracking consumer expectations for economic conditions over the next 12 months and five years increased by 5.8% and 5.2% respectively. The sub-index tracking responses on ‘whether now is a good time to purchase a major household item’ rose by 1.1%.

Respondents were also more positive around their own finances. The sub-indexes tracking assessments of finances relative to a year ago improved by 4.6%; and the outlook for finances over the next 12 months improved by 3%.

However, disturbingly, the sub-index tracking respondents’ outlook for their finances over the next 12 months is still 9.4% below the level in October last year prior to the beginning of the Reserve Bank’s rate cut cycle.

The Board of the Reserve Bank next meets on August 7. It is our view that interest rates in Australia are still too high. In his Statement following the interest rate decision on July 3 the Governor described interest rates as “a little below medium term averages”. With the Australian dollar back above parity, despite lower commodity prices, and fiscal policy being quoted by the RBA to be contradictionary in the order of 0.75% – 1.5% of GDP financial conditions in Australia are mildly stimulatory at best. Although there are tentative signs of improvement emerging in some interest rate sensitive parts of the economy, these have yet to show a convincing recovery and remain vulnerable to renewed weakness. Mean while the threat from a deteriorating global economic outlook continues to build.

Not with standing these issues the recent rhetoric from the Bank indicates that it is in a ‘wait and see’ mind set. Accordingly, whilst we think it is likely that, as we saw in the first half of 2012, the Bank’s ‘wait and see’ approach will eventually evolve into further
rate cuts totaling 0.75%, our call that the next cut will come in August could prove to be too early. However, because we believe that Australia needs lower rates and much can happen, particularly in the international economy, we are comfortable
maintaining that view.

Sourced from Bill Evans -Chief Economist Westpac

Wednesday, 30 May 2012 13:10

Update on Debt Crisis in Europe

Written by

There has been increasing sharemarket volatility in recent weeks following the inconclusive election results in Greece.

What will happen next?
We believe that policymakers in Europe will be keenly aware of the lessons learnt from the financial crisis of 2008. Because of this, we do not necessarily believe that a disorderly Greek exit is a foregone conclusion.

Elections in Europe demonstrate that budget cuts or austerity will only ever be plausible so long as they have the support of the public. Voters in France, Italy and Greece have all unequivocally rejected the austerity at all costs approach so far in managing the crisis.

The French election has shifted the pendulum towards the possibility of a more lasting solution to the crisis - one that balances long-term structural reform, pro-growth policies and balanced budgets.

Greek exit not a foregone conclusion
While the last election in Greece saw voters resoundingly reject austerity, they equally rejected an exit from the Euro. A disorderly exit may be prevented by political will and the need to contain adverse outcomes for Europe and the rest of the world.

And, make no mistake, policymakers in the US and Asia will be tapping the shoulders of their European counterparts for an immediate and lasting solution. This may see Europe agreeing to fund Greece or a preplanned, orderly exit from the Euro.

What is the impact of the European crisis to the rest of the world?
The relative importance of Europe to Australia is small and declining – less than 10% of our exports go to the region. Asia is much more important and this dominance will only grow on record amounts of investment in the energy and resource sector.

The impact on China is also expected to be manageable. While Europe is China’s biggest customer for its exports, the recent slowdown in China has been driven primarily by higher interest rates to curb uncomfortably high inflation.

The US recovery is also continuing, and for Europe, Greece represents less than 3% of the European economy, implying that the crisis can be managed.

Given the potential escalation to Italy and Spain there is a common interest amongst all to put brinksmanship aside and implement a workable and lasting solution.

Interest rates and the AUD - twin support measures for Australia
If the European situation were to deteriorate Australian policymakers can rely on lower interest rates and a depreciating currency.

The RBA recently cut rates by 50 basis points, which is expected to support the non-resource economy, including retail sales and housing.

The Australian dollar will also track European concerns but the pace of depreciation has so far been much less than during the financial crisis in 2008.

The Federal Government also has scope to provide stimulus to the economy should there be a need to do so.

Things to consider
In periods of uncertainty many turn to cash or other strategies perceived to be safe. It is during these periods that investors all too often make decisions that are contrary to their long-term objectives.

While equity markets may well fall if Greece were to exit the Euro, it is important to also recognise that the global economy is still growing and global companies are making profits, paying back their debt and providing dividends to investors.

At the same time, the return on cash investments will decline on interest rate cuts. Bond markets look fully valued with yields near, or at, record lows for many developed economies.

During uncertain times long-term opportunities are most likely to emerge while equity markets remain below long-term valuations and policymakers may surprise markets, which could lead to a sharp turnaround in the price of equities.

Remember that frequent and undisciplined changes to your portfolio may lead to poor results. History has shown that missing just a few of the best months in equity markets may substantially reduce your overall return.

Note: Advice contained in this article is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at May 2012.

Monday, 28 May 2012 11:25

Age Care Reforms Announced

Written by

On 20 April 2012, the Prime Minister and the Minister for Social Inclusion and Minister for Mental Health and Ageing, announced the ‘Living Longer Living Better’ plan, a 10-year plan beginning on 1 July 2012.

To make it easier for older Australians to stay in their home while they receive care, the Government will:

  • Increase the number of Home Care Packages- from 59,876 to almost 100,000     (99,669).
  • Provide tailored care packages to people receiving home care, and new funding for dementia care.
  • Cap costs, so that full pensioners pay no more than the basic fee.

To make sure more people get to keep their family home, and to prevent anyone being forced to sell their home in an emergency fire sale, the Government will:

  • Provide more choice about how to pay for care. Instead of a bond which can cost up to $2.6 million and bears no resemblance to the actual cost of accommodation, people will be able to pay through a lump sum or a periodic payment, or a combination of both.
  • Give families time to make a decision about how to pay, by introducing a cooling-off period.
  • Cap care costs, with nobody paying more than $25,000 a year and no more than $60,000 over a lifetime. This measure will not affect people already in the system.

To ensure immeditate improvements, the Government will also:

  • Increase residential aged care places from 191,522 to 221,103
  • Fund $1.2 billion to improve the aged care workforce through a Workforce Compact.
  • Provide more funding for dementia care in aged care, and more support for services.
  • Establish a single gateway to all aged care services, to make them easier to access and navigate.
  • Set stricter standards, with greater oversight of aged care.

Implementation of the reforms will be overseen by a new Aged Care Reform Implementation Council. The new reform package will be implemented in stages to enable providers and consumers to gain early benefits of key changes and have time to adapt and plan for further reform over the 10 years.

Home care

  • Home Care packages will increase from 59,876 to 99,669 over the next 5 years
  • Under new means-testing arrangements for Home Care packages, which will start from 1 July 2014, a consistent income test will be introduced. This will ensure that people of similar means pay similar fees – regardless of where they live – with safeguards for those who can least afford to pay.
  • The means test will not include the family home, which remains exempt.
  • People currently receiving a Home Care package will not be subject to the new arrangements while their current care continues.
  • In addition, to protect care recipients with higher than average care needs, an indexed annual cap of $5,000 for single people on income less than $43,000, and on a sliding scale of up to $10,000 for self-funded retirees, will apply to care fees. A lifetime care fee cap of $60,000 will be introduced.

Residential care

  • From 1 July 2014, the maximum accommodation supplement that the Government pays to aged care providers when people are unable to meet the cost of their accommodation will be increased from $32.58 to around $52.84 per day. As a result, the Government expect aged care places to increase from 191,522 to 221,103.
  • There will be more choice about how to pay for their care. Residents can pay for their accommodation in a lump sum, periodically, or a combination of both. A new cooling off period will mean that residents will not need to decide how they are going to pay until they have actually entered care.
  • From 1 July 2014, residential care means testing will be strengthened and improved. The treatment of the family home will not change from current arrangements.
  • An annual cap of $25,000 and a lifetime cap of $60,000 will apply to care fees.

Source: Hon Julia Gillard, Prime Minister & Hon Mark Butler, Minister for Social Inclusion & Minister for Mental Health & Ageing, Media Release.

 

Friday, 27 January 2012 13:17

Global Economy - A Little Less Scary

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Introduction

The past few weeks have been interesting. Sovereign rating downgrades in Europe have intensified. The World Bank and now the International Monetary Fund (IMF) have slashed their growth forecasts for this year and warned of the risk of a global downturn worse than that associated with the global financial crisis. Yet share markets and other  risk trades  have almost said “ho-hum”. So what’s going on? Our take is the markets are telling us that a lot of the bad news has already been factored in. The ratings downgrades were flagged back in early December and the World Bank/IMF growth forecasts downgrades have only just caught up to private sector economists.1

This is not to say we are out of the woods, or that volatility will disappear. But it does seem the risk of a global financial meltdown has receded  somewhat and that the global economic  recovery appears to be continuing.

Europe – reduced risk of a financial blow-up Europe is on track for a mild recession  but the risk of a financial blow-up resulting in a deep recession  seems  to have receded  a bit. The provision of cheap US dollar funding by the US Federal Reserve and very cheap euro funding for three years by the ECB under  its long-term refinancing operations appears to have substantially reduced the risk of a liquidity crisis causing banking  collapses. It has also reduced pressure  on European banks to sell bonds in troubled countries.

We would have preferred the ECB to have directly stepped up its buying of bonds in troubled countries, but its back door approach has nevertheless seen a sharp expansion in the ECB’s balance sheet. In other  words, it appears to have embarked on quantitative easing, albeit it wouldn’t admit  it.

Reflecting this, bond yields in Spain, Italy and France and spreads to Germany – which were surging towards the end last year – have settled down. Similarly, European  bank stock prices appear to have stabilised.

This is not to say Europe is no longer a source of risk. It still is – it’s doubtful that even with the proposed debt restructuring Greece’s public debt is on a sustainable path, fiscal austerity is still bearing  down on growth across Europe, more ratings downgrades are likely and monetary conditions are still too tight. But the risk of a meltdown appears to have receded. What’s more European business conditions indicators have picked up in the last two months.

In November, we referred to three scenarios  for Europe:

1.  Muddle through – i.e. a continuation of the last few years of occasional  crises temporarily settled by last minute bare minimum policy responses.

2.  Blow up – in which a financial crisis and deep recession  see a break-up of the euro.

3.  Aggressive ECB monetisation – with quantitative easing  heading off economic calamity, albeit not quickly enough to prevent a mild recession.

Recent action by the ECB appears to have reduced the chance of the ‘Blow up’ scenario (probably to around 25%). The costs of leaving the euro for countries like Greece (which would include a likely banking  crisis as Greek citizens rushed to secure their current bank deposits,  which are all in euros, and default on its public debt anyway) still exceed the likely benefits, so it still looks like the euro will hang together. Overall, the most likely scenario  appears to be some combination of ‘Muddle through’ but with more aggressive ECB action preventing it from spiralling into a ‘Blow up’.

 

The US – no double dip (again)

During the September quarter a big concern was that the US economy would ‘double dip’ back into recession. This, along with escalating worries about Europe and the loss of America’s AAA sovereign rating, combined to produce sharp falls in share markets.  Since then, US economic data has turned around and surprised on the upside:

>   Retail sales growth has hung in around 7% year-on-year despite a sharp fall in consumer confidence

>   Jobs growth has picked up

>   Housing-related indicators have stabilised and in some cases started to improve, and

>   Gross domestic product (GDP) growth has picked up pace again after a mid-year softening.

Earlier concerns about a 1.5% to 2% of GDP fiscal contraction in 2012 dragging growth down have faded as Congress has agreed to extend payroll tax cuts and expanded unemployment benefits for another two months, with a good chance they will be extended for the full year.

More fundamentally, the US appears to be starting to enjoy somewhat of a manufacturing renaissance (in stark contrast to Australia!).  there are numberous anecdotes of global companies moving manufacturning to the US including Electrolux, Siemens, Maserati and Honda (which chose to build a new ‘super car’ in Ohio rather than in Japan). Furthermore, General Motors is now the world’s top selling car maker again. Could a decade-long fall in the US dollar and very strong productivity growth be sowing the seeds of a long-term turnaround in America’s fortunes?

 

China – so far so good

Chinese economic growth has slowed to 8.9%, but there is no sign of a hard landing. Export growth has slowed sharply but so too has import growth and in any case net exports have not been a contributor to growth in recent years. Moreover, retail sales growth has held up well and fixed asset investment has slowed only slightly.

Furthermore, falling inflation (from 6.5% in July to 4.1% in December) and a cooling property market, evident by falling prices in 52 of 70 major cities in December, and falls in sales and dwelling starts  provide authorities with the ability to ease the economic policy brakes. And there is plenty of scope to ease.   Large banks are currently required to keep a record high 21% of their assets in reserve, the key one-year lending rate is at 6.6%, the budget deficit was just 1.1% of GDP last year and net public debt is around zero once foreign exchange reserves of US$3 trillion and other assets are allowed for.

After doubling between October 2008 and August 2009 on global financial crisis related stimulus and a growth recovery, Chinese shares fell 38% to the low early this month as investors feared tightening policy would result in a hard landing.  With Chinese price to earnings multiples having fallen back to bear market lows and policy starting to ease again, decent gains are in prospect over the next few years.

 

Global growth

The next chart highlights the improvement recently in global economic indicators. Manufacturing conditions in most  major countries were in decline into the September quarter, but in recent months have either stabilised or started to improve.

What does this mean for investors?

None of this is to say it will be smooth sailing going forward. Europe’s problems are a long way from being solved, uncertainty remains regarding fiscal policy in the US, Chinese authorities will need to ease soon to ensure a soft landing and the Reserve Bank in Australia also needs to cut more. On top of this, after a solid start to the year shares are getting a bit short-term overbought, some short- term sentiment measures are a bit elevated and the hot and cold pattern of US data releases warns we may soon see a cold patch. So shares are vulnerable to a short-term setback (with February often a soft month in contrast to the seasonal strength seen in January).

However the improved global economic outlook and reduced tail risks regarding Europe suggests 2012 should be a better year for shares and other risk assets.  This is also supported by the fact that shares are starting the year well below year ago levels.

Signposts investors should watch  include: the size of any share market  setback  in the seasonally weak month of February; bond yields in Italy, Spain and France; the US ISM manufacturing conditions index; and Chinese money supply growth.

Dr Shane Oliver, Head of Investment Strategy and Chief Economist

AMP Capital Investors

 

 

PLEASE LEAVE A COMMENT/QUESTION BELOW

 

1 Our global growth forecast for 2012 is 3%, which compares to the IMF’s new forecast of 3.25% and the World Bank’s new forecast of 3.4% (if purchasing power parity weights are used to combine  countries).

 

Note: Advice contained in this articler is general in nature and does not consider your personal situation or needs. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.  While the taxation implications of this strategy have been considered, we are not, nor do we purport to be registered tax agents. We strongly recommend you seek detailed tax advice from an appropriately qualified tax agent before proceeding.  The information provided is current as at January 2012.

 

 

 

 

Tuesday, 29 November 2011 15:56

Protect Your Biggest Assest: Your Ability To Earn

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Protect your biggest asset: your ability to earn

If your lifestyle is dependent on your ability to work, an extended period of absence through illness or injury could be devastating to you and those who are dependent on you.

Income protection insurance replaces your income up to the insured benefit amount of the policy. Most commonly the maximum cover is 75% of earnings (after business expenses, but before tax)

The waiting period can vary; it can be as short as 14 days or as long as two years or more. It is important to remember that benefit payments usually do not start immediately; a waiting period will apply during which no benefit is payable.

The maximum period of time that payments continue is called the benefit period. A range of benefit periods are available — some as short as one year, with the longest continuing through to age 65. Once benefits start, payments are usually made monthly in arrears.

Tax effectiveness - Premiums for income protection policies have the benefit of being fully tax deductible – a good way to protect yourself and reduce tax.

What are the alternatives? - Is this the insurance you have to have? It’s up to you of course, but consider some of the alternatives……….

Family assistance - You could rely on family or friends to help you but they’re likely to have their own financial obligations, and this may needlessly strain your relationship.

Savings - You could use savings in the short term to support yourself, but problems arise if your savings are not readily accessible or your incapacity is long term. You are also spending money that you’ve worked hard to save over an extended period of time.
Employer - You may be a valuable employee but your employer is unlikely to be able to continue paying you and find, train and pay your replacement.

Benefits - Workers’ compensation may help if your injury or illness is work related. Or social security may be available, if you meet the means tested eligibility criteria. In both cases, the benefit levels are unlikely to meet your needs.

 

Note: Advice contained in this flyer is general in nature and does not consider your particular situation or needs. If information contained is not appropriate to you at this stage please pass on to family and friends who may benefit. Please do not act on this advice until its appropriateness has been determined by a qualified adviser.

For more information on Income Protection Insurance or to arrange a no-cost, no-obligation first consultation, please contact: GEM Capital on Ph:8273 3222

What are the chances of being prevented from working as a result of a sickness or injury? More than 60% of Australians will be disabled for more than 1 month during their working life. More than 15% will be disabled for more than 3 months during their working life. Source: Institute of Actuaries Table IAD 1989-93 and ALT 90-92

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