Monday, May 6, 2013

Pain hits business before it hits the budget

As we approach the budget next week we're hearing a lot about how the strangely weak growth in nominal gross domestic product has hit tax collections, particularly from company tax.

But we're hearing a lot less about what this implies is happening to the "real" economy.

What's causing nominal GDP to be so weak - weaker than real GDP - is that although the prices of our mineral exports have fallen a fair bit, the dollar hasn't also fallen, as it was expected to. This means we're getting the worst of all worlds.

The miners are getting lower prices, but still losing as much from the high dollar. The other export and import-competing industries - farmers, manufacturers, tourist operators and others - who gained little from the resource boom are still being robbed of their international price competitiveness when they could have expected to be getting a bit of relief by now.

If company tax collections aren't growing as strongly as had been expected, this must be because corporate profits are weak.

In fact, the national accounts version of corporate profits ("gross operating surplus") has fallen in nominal terms for five quarters in a row and by 4 per cent over the year to December.

So company profits are being squeezed - which is really only what you'd expect when the dollar's been so high for so long. Even so, it helps explain why businesses are so unhappy and blaming the Labor government for their troubles.

But the consumer price index for the March quarter showed puzzling things are happening to a sector you'd expect to benefit from a high dollar: retailing.

It showed that whereas the retail prices of "non-tradeables" - goods and services not able to be traded internationally - rose by a hefty 1.3 per cent in the quarter and 4.2 per cent over the year to March, the retail prices of "tradeables" fell by 1.2 per cent in the quarter and 0.2 per cent over the year.

This is further evidence manufacturing and tourism are under a lot of pressure.

But it's also a puzzle because it's only when the dollar is rising that you would expect the prices of tradeables to be falling. As Paul Bloxham of HSBC bank has observed, the Australian dollar has been broadly steady for more than two years.

According to the CPI, retail furniture prices fell 6.8 per cent in the quarter and 2.3 per cent over the year.

Household textile prices fell by 6.7 per cent and 4.3 per cent. Appliance prices fell by 2.5 per cent and 4.4 per cent.

Retail prices of audio-visual items fell 4.7 per cent and 13.5 per cent, while overseas holiday prices fell by 5.2 per cent and 0.4 per cent.

Michael Workman of Commonwealth Bank argues the lower prices of imported goods and services are a reflection more of weak global consumer markets for European and Asian producers than the effect of the high dollar.

That is, foreign suppliers are cutting the prices they charge Australian importers so as to keep their sales up. If so, the lower prices our retailers are charging customers aren't coming out of their own hide.

Well, that's one theory. But others aren't so reassuring. Another theory is that weak demand and intense competition between retailers is obliging them to cut their prices at the expense of their profit margins.

They may be starting to feel the heat from customers using the internet to discover the lower prices being charged overseas, or using their smartphones to seek lower prices from other stores while haggling with shop assistants. If so, their profits are being "compressed" as the econocrats put it.

I have a theory retailing is suffering from a lot of excess capacity - too many stores - because it geared itself to a world where the rate of household saving kept falling, so that consumer spending grew consistently faster than household incomes.

Now the saving rate seems to have stabilised at 10 per cent, spending can grow no faster than incomes, meaning stores are competing to see who survives and who doesn't.

If so, this would be squeezing profits - at least until the losers shut up shop, so to speak.

Yet another possibility - which would apply to the manufacturers and tourist operators as well as the retailers - is that several years of heightened competitive pressures have obliged firms to find tough ways of lifting their productivity and then pass the savings through to their customers rather than taking them to the bottom line.

Whatever the truth of the situation - maybe some combination of all the various possibilities - it's not hard to see why the retailers are just as unhappy as the manufacturers. And don't forget a big part of small business is in retailing.

But not to worry, chaps. As soon as Julia's out and Tony's in, he'll fix everything.

Pain under the Libs is much easier to take.