GDP to slow: When the March quarter’s national accounts are released in early June, there will be a sharp fall in annual GDP growth rate to under 2%, where it could stay for the best part of a year or more. This underlines the below-trend sluggishness of the economy once and for all. Even a strong performance by exports (iron ore, coal, bauxite, aluminium, and rural commodities won’t be able to drag growth back over 2% and back to the levels we saw in 2014 — 2.4%. Why?
Well, the comparative base changes with the March 2015 quarter because the very strong 1.1% growth figure for the March quarter of last year (which was bolstered by the now rare combination of high exports and high prices for iron ore and some other commodities) drops out. Growth in the June quarter of last year was 0.5%, in the September quarter it was 0.4%, and the December quarter, 0.5%. To maintain growth at 2.4%, growth this quarter would have to be 1.1%, but that plainly won’t happen — not with iron ore and coal prices low and the recent fall in oil and gas prices. The housing boom won’t be enough to boost growth — it will help it tick along. But for the Reserve Bank of Australia, it’s the worst of all outlooks — slowing growth as we approach the resources investment cliff in 2015-16. That won’t feature in today’s Intergenerational Propaganda Report from Treasurer Joe Hockey, and yet the slide in growth and the potential investment black hole in 2015-16 will drive a hole through the budget and Joe’s claims today. And that investment black hole will give the Abbott government a major headache as it approaches the 2016 federal election. — Glenn Dyer
SUVs rescue car sales. One of the surprises of the fourth-quarter GDP numbers was the strength of household spending and consumption — up 0.9% and nearly 3% over the year. Car sales were solid in 2014 (they are a key area of spending) — more than a million sold, again in a near-record year. And they have started 2015 solidly, thanks to lower oil and petrol prices. Industry figures out yesterday showed a record number of sales in February of 90,424, with sales of sports utility vehicles (SUVs) up 24%. Now some of the reporting claimed these were gas guzzlers, but a look at the sales data shows that to be rubbish.
SUVs accounted for 53% of all sales last month. That’s a high, but the overwhelming proportion of those sales were for small SUVs. They are far from being the huge V8 petrol-eaters (or Toorak Tractors) churning their way down city streets. The figures, from the Federated Chamber of Automotive Industries showed a 50% jump in sales of small SUVs (which are highly fuel efficient, small-engined vehicles — many are diesel powered).
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By way of contrast, the Chamber said sales of medium and large SUVs grew by just 14% and 19%, respectively. Passenger vehicle sales were down 6.6% from a year ago to 40,775. Year-to-date sales were up 2%, meaning February’s rise wiped out the fall in January, and then some more. Private purchases of SUVs rose 24%. But could this be the boom before the slide? The impact of the weaker dollar has yet to appear in car prices — but that will, in turn, be offset by the weakness of the yen and the euro against the Aussie dollar, and the impact of free-trade agreements with South Korea and Japan. — Glenn Dyer
Discounted dividend, anyone? Besides discounting surplus stock, Myer shareholders will have to be prepared to accept a big discount in the dividend, or even its abandonment for a while to help finance the latest (last?) turnaround plan. Myer’s current dividend is definitely too high for its present circumstances, let alone what the interim results on March 19 will bring. In 2013-14 it paid a total of 14.5 cents a share (an interim of 9 cents a share and a final of 5.5 cents), down from the 18 cents a share paid in 2012-13 (10 cents a share interim, and 8 cents a share final). That is definitely unsustainable and looks like being cut, as local supermarket supplier Metcash has done to help finance its five-year turnaround. — Glenn Dyer
Learn from Britain. Myer can look to the UK where retailers are struggling, especially supermarkets (from aggressive discounters such as Lidl and Aldi, which is terrorising Metcash in Australia), and slashing dividends as a result. Tesco has dropped its dividend completely for 2014-15, in addition to axing stores, offices, senior executives (including the CEO and chairman) and taking billions of dollars in losses. It is also being investigated for accounting irregularities of more than half a billion Aussie dollars.
Sainsbury’s, another big UK supermarket chain, has decided to cut its dividend to help finance price cuts (and slashing spending, jobs, store numbers and taking huge losses on write-downs). A third retailer, Morrison’s, is expected to reveal a halving of profit when it announces full-year results next week. It will maintain a commitment to lift the dividend for the year by 5%, then abandon that idea for the coming year, setting it much lower — between 40% and 60% lower is the forecast from London analysts. Myer has 78 stores across Australia and that will be cut — by how much, no one knows, but given the current sales performance, it is clearly too many. At 14.5 cents a share, the dividend in 2013-14 cost Myer over $82 million. Halving that over three years (around $40 million) would generate more than half the $200 million analysts reckon the revamp program will cost. But that assumes no change in the company’s profitability, which there clearly has been from comments made this week by the board and the need for change and transformation. So dropping the dividend for three years might be the right, but tougher option. — Glenn Dyer
Oil slide’s first casualty: Is the small London-based oil and gas explorer Afren Plc the first casualty of the great oil price slide of 2014-15? Plenty of companies large and small have seen their value halved (and then some) by the great oil price slide, but so far, to the best of my knowledge, none have been destroyed, as Afren has. The company’s shares crashed 37% overnight in London after it revealed it would not be making a US$15 million dollar bond interest payments due last month. They ended down 27%.
The company told the market that shareholders could be “substantially” diluted as part of a potential restructuring deal with bond holders. Afren has admitted it is facing default on its 2016 bonds (called loan notes). It had 30 days to make that US$15 million payment but has decided not to, while it is in restructuring talks which will probably result in new shares issued to bond holders. Back in May of last year, it was trading at US$2.83. Last night they closed at 11 cents. Most of Afren’s oilfields are in Nigeria. The slide in the shares has wiped out more than US$2.3 billion in market value since late last July, thanks to falling oil prices and the dismissal of top executives. The company hasn’t had a CEO since then, had failed talks with the Nigerian state oil company and could be bailed out by a former co-founder towing US$500 million in backing from a Chinese company. In other words, a slippery mess. — Glenn Dyer