macrotrends

Electioneering

Now Prime Minister Scott Morrison is leading a minority coalition government in the lower house, the remaining few months of this term could throw up policy wild cards. With the federal budget scheduled for April 2, Australians are expected to go to the polls in May, the coalition campaigning on its economic record.

Federally, economist and director Saul Eslake GAICD says business-related policy changes that may be of particular interest to directors include company tax rates, property-related taxation, tax treatment of trusts, capital gains tax, workplace relations legislation, energy policy and annual reports disclosures regarding pay structures.

The federal opposition’s pledges include restoring penalty rates, requiring large businesses to report gender pay gaps and CEO vs median worker pay publicly, imposing a 30 per cent minimum tax rate on family trusts and removing cash refunds for excess dividend imputation credits. (2017 ATO figures, analysed by The Australia Institute, show more than 800,000 trusts with assets totalling more than $3 trillion.) Labor also plans to abolish negative gearing for established properties and to halve the capital gains tax discount. On the energy side, it has outlined a policy to deliver 50 per cent of power from renewable sources by 2030.

Directors should watch closely what else emerges from the federal election campaign in an environment of declining community trust in business.

Population 2018

7.65 billion world

1.44 billion China

1.36 billion India

327.5 million USA

267.7 million Indonesia

211.3 million Brazil

24.9 million Australia

Source

Interest rates

In December, the Reserve Bank maintained the cash rate at 1.5 per cent, where it has been since August 2016, saying there was no strong case for a near-term adjustment in monetary policy.

“The economy is moving in the right direction and further progress is expected in lowering unemployment and having inflation consistent with the target,” RBA governor Philip Lowe said in a speech to CEDA.

“The probability of an increase in interest rates is higher than the probability of a decrease. If the economy continues to move along the expected path, at some point it will be appropriate to raise interest rates. This will be in the context of an improving economy and stronger growth in household incomes.”

Royal Commission fallout

Tightening of credit availability and a softening in the housing market are emerging as possible consequences of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry, with banks and credit providers warning of further constricted markets.

Rather than bringing in new laws, Commissioner Kenneth Hayne AC QC, in his interim report, indicated he would rather see existing laws obeyed and enforced by strong regulators with a preference for simplification of the legal framework.

While the Royal Commission’s focus has been on financial services, Saul Eslake believes the principles may spill over into other parts of the economy. “Other recently commenced inquiries, for example, the aged care Royal Commission, may well recommend more new laws or greater regulation,” he says.

Given Hayne’s comments, directors can also expect the Australian Securities and Investments Commission (ASIC) to take a more litigious approach to enforcement in the future, rather than favouring negotiated outcomes such as enforceable undertakings. Guerdon Associates director Michael Robinson MAICD expects regulators to be better endowed to enforce regulation. ASIC has already received increased funding for regulatory enforcement and draft legislation to lift penalties for misconduct has been released for consultation.

As well as paying more attention to culture, risk management and compliance, Robinson believes many boards will focus on reconfiguring reward systems that reflect the greater risk and reward symmetry between complying and not complying. “It is becoming apparent that there was asymmetry in our market ecosystem — more incentive and profit for going to the edge in terms of compliance and risking overreach than there was being fully compliant and, as some see it, ethical. This will be corrected.”

australian steel macrotrends

1.2 million Australian residents with Chinese ancestry — 41% (526,000+) born in China, 25% born in Australia, 46% speak Mandarin at home

Source: ABS 2016 Census

China

China is Australia’s biggest export market, most valuable tourism market and a major source of foreign direct investment. Two main themes are relevant in 2019. China’s One Belt One Road (OBOR) initiative, while not without controversy, is rapidly reshaping global infrastructure. Resources giant BHP, which has been monitoring a growing database of OBOR projects and publishes regular blogs on the topic, says it will involve US$1.3 trillion in spending in its first decade on upgraded or new railways, ports, pipelines, power grids and highways — a program more than seven times the size of the post-WWII Marshall Plan.

BHP vice-president of marketing minerals Vicky Binns writes that it will connect 115 countries or regions, covering a vast area of Eurasia and parts of Africa, Latin America and Oceania. Together, this area accounts for more than half the world’s population and around one third of the global economy. It estimates OBOR projects could add up to an incremental 1.6 million tonnes of refined copper demand, equivalent to seven per cent of China’s annual needs in 2017.

Export credit agency Efic notes that if the initiative delivers on its promises, Australian exporters could benefit from plans to import US$2 trillion in products and services from participating countries over the next five years. “Australian companies have significant expertise in finance, construction, design and engineering. Australian exporters could also benefit indirectly — infrastructure spending drives commodity demand while strengthening regional incomes should bolster consumer demand.”

There are shorter-term economic concerns. The Chinese economy is slowing as a result of the trade war with the US and a tightening of money market conditions worldwide as GFC stimulus is retracted in the US and elsewhere. The Chinese economy grew by a slower-than-expected 6.5 per cent in the third quarter of 2018, its weakest since the GFC. Its official purchasing managers’ index fell to 50.2 in October, the lowest since July 2016.

Mark Melatos, associate professor at the University of Sydney’s School of Economics, notes the rising risk of financial instability in China resulting from large debt held in the official and shadow banking system. “Whether a financial crisis occurs will depend a lot on the extent to which Chinese policymakers are prepared to nationalise bad debt in the system,” he says. “They probably will.”

Melatos believes Australian directors should also consider possible benefits from the trade war with the US if China diverts its import demand — for example, for steel — from the US to Australia.

Open data

From July 2019, banking in Australia will undergo a shake-up when financial institutions give customers access to their own data for the first time. It will start with credit and debit card, deposit and transaction account data, followed by mortgage data in February 2020 and remaining products by July 2020. The open banking regime is the first step towards the planned Consumer Data Right (CDR) in Australia, a more general right being created for consumers to control their data. It will have implications beyond the sector — businesses that hold data about consumers will need to ensure they’re aware of significant changes arising from the CDR. It will soon after be implemented in the electricity retailing and telecommunications sectors, with other sectors to follow.

While the most obvious initial application for the regime will be price comparisons, open data will enable new business models and new marketplaces around customer journeys are likely to emerge, says Paul Wiebusch, a financial services partner at Deloitte. One possibility is to provide an ecosystem that aggregates all of a customer’s financial data including other accounts, insurance, property, superannuation and investments.

More information here.

plastic waste

Waste trail

Boards should consider how their organisations, suppliers and customers might be affected by changes in the market for recycling and waste management.

In January 2018, China permanently banned the import for recycling of certain plastic and paper waste from more than 100 countries, including Australia. Malaysia has since frozen its imports and Indonesia and Vietnam may follow suit. China’s ban caused the price of local waste to fall, reducing the profitability of garbage collection. Large amounts of recycled material are being stockpiled, posing fire/pollution risks, or are being dumped in Australian landfills.

In April 2018, state and federal environment ministers endorsed a target of 100 per cent of Australian packaging being recyclable, compostable or reusable by 2025 or earlier, and agreed to advocate for increased use of recycled materials in goods and construction materials. Plans are also in train to update the 2009 National Waste Policy. The federal government’s September 2018 discussion paper on this contained targets such as reducing the total waste generated in Australia per capita by 10 per cent by 2030 and achieving an average 30 per cent recycled content across all goods and infrastructure procurement by 2030. Steps the government might consider include bans on single-use plastics, tax incentives to boost plastic recycling, tariffs on imported plastic packaging and a tax on resins.

World economic outlook

The recent volatility in global stock markets shows how uncertain the global economic landscape has become with rising nationalism and protectionism. Saul Eslake believes directors should watch developments associated with rising US interest rates, including risks for equity markets and emerging market economies, which have borrowed heavily in US dollars.

“Although it might not seem a real prospect at the moment, there’s also a risk of the US economy overheating, partly as a result of the combination of the Trump administration’s spectacularly mistimed fiscal stimulus and its trade policies,” he says.

Both of these may also add to inflation at a time when, at least by some measures, there is little spare capacity in the US economy. “I’m not saying inflation is likely to rise to levels that would seem high by historical standards, just that it could rise more quickly, and by more than is currently expected, which is not very much at all,” says Eslake. “If that were to happen, the reaction from the US Federal Reserve and/or the financial markets could be quite abrupt and disruptive.”

Also of concern is the ongoing deterioration in the economic and political relationship between the US and China and the difficulties this potentially creates for Australia given its strong economic dependence on China.

Brexit

While the UK and the European Union have concluded a formal agreement for the UK’s exit in March 2019 (yet to be ratified by the UK parliament), there is great uncertainty as to what future UK/EU relations will look like. Melatos worries this could affect consumer and business confidence. “There’s also a non-trivial risk of a significant Brexit-induced economic slowdown arising in the UK especially, but also possibly in the EU, especially if the deadline for a final agreement keeps being delayed,” he says.

The devil will be in the detail on the type of deal reached. Global rating agency Standard & Poor’s says Brexit could lower the UK economy’s long-term growth potential. Most of the economic loss of about 5.5 per cent of GDP over three years could be permanent.

Australian boards should be examining whether management has contingency plans to prepare for life post-Brexit and whether it has calculated the company’s potential exposure. Melatos says this could include lost contracts with customers or suppliers, additional regulatory compliance costs (due to different regulatory requirements in the UK and EU), additional transactions costs such as tariffs associated with doing business across a UK/EU border, loss of critical staff due to visa/residence issues and less mobility of staff between UK/EU and around EU. Directors should also examine potential opportunities such as benefits from free trade agreements (FTA) with the UK and EU. An FTA with the EU would give access to a market of half a billion people and a GDP of US$17.3 trillion. It is also an opportunity for organisations to review where their operations are located. “Basing European operations in the UK and Europe will no longer be equivalent,” says Melatos. “Management must give boards good reasons why maintaining the status quo makes sense.”

donald trump macrotrends

US$1.3 trillion estimated value of infrastructure programs already initiated under One Belt One Road

Source: BHP

Global (in)security

Directors might want to consider whether their organisations could get caught in the crossfires of the deteriorating global security environment and the way governments are taking threats to national security more seriously. This isn’t about terrorism, worrying as that is, but rather threats posed by the increasing economic, technological and military power of China and Russia, and their greater assertiveness in deploying that power.

Duncan Lewis, director-general of the Australian Security Intelligence Organisation, told a Senate estimates hearing in October that espionage and political interference by foreign powers was at unprecedented levels in Australia and posed a major risk to security. Activities range from political donations and cyber attacks to espionage and even attacks on expatriates — examples include the murder of Saudi journalist Jamal Khashoggi in Turkey and the attempted murder of ex-Soviet spy Sergei Skripal in the UK. Such moves are emboldened by an apparent decline in the power of the US and its increasing disengagement from the postwar system of international alliances and institutions.

“One of the consequences is that governments, including Australia, are more willing to assert their powers in the name of national security, without necessarily feeling any obligation to explain to the general public why they are doing it, beyond citing security considerations,” says Saul Eslake. “Businesses may find themselves required to do things for reasons of national security. It could also be used by governments as reasons to walk away from FTAs or from subsidising particular businesses.”

India

The Asian Development Bank expects India — with 7.3 per cent growth rate in 2018–19 and 7.6 per cent in 2019–20 — to continue to be the world’s fastest growing major economy, ahead of China. According to the UN, India is also on track to become the world’s most populous nation in less than a decade.

Stephen Manallack, a director of India strategy consultants EastWest Academy, who writes the Into India blog, notes that more than half India’s population of 1.4 billion is under 25 years old. “No country has more young people,” he says.

A recent Department of Foreign Affairs and Trade report forecasts that over the next 20 years, no single market will offer more growth opportunities for Australia than India. Manallack says the issue for directors is first how to understand India, and then how to properly engage with this emerging growth economy.

India’s finance sector is booming and funds under management are at record levels, signalling a major shift in investor behaviour and demand for services and systems to manage that growth. With growing urban populations, agribusiness offers opportunities, energy such as wind and solar are making big advances, and water and waste management continue to demand more suppliers and advisors. Education also continues to be a big opportunity while health care and health insurance are growth areas. Bilateral relations could be further ignited if the Australian government continues to prioritise the conclusion of an FTA with India.

Australia has a strong base to build from, with people born in India accounting for 1.9 per cent of Australia’s population.

Environmental Risks

With climate risk and environmental constraints on the business agenda, it’s worth paying attention to the World Economic Forum (WEF) Global Risks Report 2018 — which includes extreme weather events and temperatures, accelerating biodiversity loss and pollution of air, soil and water among its global threats. The WEF warns rising temperatures are a major risk for agricultural systems, saying: “Our analysis shows the likelihood of missing the Paris Agreement target of limiting global warming to 2ºC or below is greater than the likelihood of achieving it. This is likely to exacerbate the impact of global environmental risks.”

A Complimentary for AICD members: In A Macroeconomic Outlook for 2019, Deloitte partner Nicki Hutley discusses the impact on directors and organisations. To register, click here.