NOVEMBER 2010 Economic and Labour Market Trends James Judge, a Principal Consultant in the Donington Sydney office looks at current Economic and Labour Market trends. James has been published in various journals and reports and written commissioned articles for newspapers including the Australian Financial Review. The Headline is Good News September brought some better news for those Australians searching for full time work (at least from a purely statistical perspective) with the official national unemployment figure published by the ABS down to 5.1%. The IMF Country Re- port for Australia, released in October, also painted a posi- tive picture of the current state of the economy asserting that we are recovering from the GFC on the back of strong policy stimulus and the high demand for our mining exports, especially from China. The mainstream media seems to broadly concur with this upbeat outlook. Certainly in looking at those stories that traverse both the economy and the labour market, there seems to be an emerging consensus that the financial crisis is, locally speaking, now a non-issue. GFC related themes have been replaced with issues like the perennially popular “skill shortages stories”. As is always the case, beneath the positive headline figures resides a more complex picture with different developments and trends exerting sometimes asymmetrical influences across sectors and regions. Risks to further growth? Despite our managing our way through the worst of the GFC through careful economic stewardship, or maybe avoiding the worst consequences through the good fortune of having lots of resources to export to emerging economies there are particular risks to further growth. While projecting real growth to recover to 3 to 3 ½% in 2010 and 2011, the IMF report cited earlier recognised both downside and upside risks to recovery. On the downside, there is the danger of a stalling of the global recovery, or more “financial turmoil”, causing a rise in the cost of capital (the big 4 banks borrow a lot of offshore money to fund housing loans) and it’s the financial services sector that will bear the immediate brunt of any such double-dip or credit shock. The upside risk is that the mining boom continues to burgeon causing unwanted inflationary pressures. In this case it will be average householders who suffer due to a two speed economy, particularly in those regions of Australia not immediately benefiting from the mining boom. The Education Sector Looking at particular sectors, perhaps one of the strongest specific negatives we’ve seen widely reported lately is the downturn being experienced by those segments of the education sector geared to servicing overseas students. With all the hype on the extractive industries, the importance of the education sector to Australia’s exports should not be over- looked. It’s easy to forget that education services are our third largest exporter (when you add-in expenditure by over- seas students). Those following the news in Victoria will have seen overseas student stories linked to a particular State Government employer. In truth, a confluence of issues has probably caused a decline in overseas student numbers with perceptions of a lack of welcome being only one causal factor, tighter regulatory controls to stop shonky operators and a stronger Aussie dollar being the other two candidates. The impact of a rising Australian Dollar A rise in the value of the Australian dollar, if sustained, will exert an immense influence across the economy but its im- pact will vary greatly across different industry sectors. Speaking of dollars, the impact of so called “Currency Wars” got a lot of media attention during October. Put broadly, the term “Currency Wars” refers to policies undertaken by certain countries to devalue their currency relative to other currencies (thus making their outstanding debt less expensive to re- pay and, arguably, cheapening the costs of their exports). While Australia isn’t likely to be firing a shot in any such war, some sovereign governments have recently imposed capital controls, engaged in open Forex market operations or in- creased their money supply. The quarterly Commsec “State of the States” report, also released in October, specifically referenced the price of the dollar affecting the performance of many of the States. Here Queensland, NSW and Tasmania received less than stellar report cards with a drop in tourism and retail sales, among other things, exerting an adverse influence on these regional economies. Both tourism and retail sales fall into the more broadly defined “services sector” which is the biggest em- ployer in Australia engaging more than 9.6 million people at the end of the 2009-10. This constitutes a whopping 86% of the Australian workforce and is therefore certainly one to watch in terms of its exposure to changing macro-economic factors. Within the services sector, healthcare & social assistance make up the largest sub-grouping at 12.8% of total sector em- ployment. More sensitive to changing economic conditions are the second and third largest sub-sector, retail trade at 12.5% and construction at 10.7%. A steady series of interest rate rises by the Reserve Bank to fight inflation could have a major impact on discretionary spending (especially given Australian’s collective mortgage indebtedness) thus making retail employment particularly vulnerable to this trend. Construction is also particularly sensitive to interest rate fluctua- tions so it’s a sector to monitor as the inflation and interest rate picture plays out in 2011. Housing Prices While there is certainly a chorus of people who believe that housing prices will inexorably rise due to a lack of new con- struction and population growth, the Economist’s survey of global house prices, also published in October, ranks Australia as the most overvalued housing market in the world (63.2% overpriced based on comparing the current ratio of house prices to rents with its long run average) . Coming in at second place in the same survey was Hong Kong (apparently overvalued by 58.1%). One could argue that the Special Administrative Region also has population pres- sures and perhaps a lack of available land but housing prices there are still more affordable than in the wide land down under? The IMF mission chief for Australia, Ray Brooks, in an as yet unpublished report, agrees that Australian house prices are overvalued with the figure mentioned here being 15%. With Credit Suisse recently putting property at 64% of total Australian household assets, the impact of a series of official interest rate rises to combat inflation augmented by above official rate increases by the banks (as they face increased overseas costs to fund their borrowings) is a trend to watch. If this scenario plays out and there is a property market correction, we could have a very vulnerable, highly indebted, household sector. Other Regional Trends There were no surprises that WA and the ACT scored very well in the Commsec “State of the States” report. Both re- gions recorded lower levels of unemployment and strong population growth. The same report ranked the NSW econ- omy the worst in the country, a ranking immediately contested by members of the NSW Labor government. As I write this I see that the latest Newspoll (published 29 October) ranked the Keneally government as the most unpopular Labor government there has ever been in Australian history. To state the obvious, a convergence of indicators here gives us a good signal for the likely outcome of NSW State election to be held next March. Whether a new government would attempt to significantly reduce the size of the NSW public sector, which has already enduring a long term hiring freeze, is unclear. If a program of major reduction was pursued and successfully imple- mented, it could have a significant impact on the NSW labour market. While there would undoubtedly be a fight with the public sector unions, whose membership has dropped dramatically over the last few decades, it might be difficult to de- liver more and better services to residents of NSW with fewer public servants. On that note, according to the latest sta- tistics I can find from the ABS (June 2009) there are around 430 thousand employees in the NSW State Government. By comparison, the total number of employees in the Commonwealth Public Sector across Australia came in at 243 thou- sand! Other Indicators to Watch Despite the welcome drop in unemployment, the total “underemployment” figure for September published by Roy Mor- gan Research was still at a relatively high 13.1%. This means there are a large number of people out there working fewer hours than they would like. On the issue of poverty, another report from Roy Morgan, this time commissioned by the Salvo’s and published in mid-October, asserts that two million Australians are living in poverty with the number of "working poor" growing rapidly. The rising cost of living and a lack of affordable housing are seen as main drivers caus- ing financial stress for low-income families. If poverty is now spreading to include those with jobs, then how is the engine of employment that is Australian small business fairing? Dunn and Bradstreet, who among other things track business-to-business payment terms, recorded that in mid-October, Australian companies suffered a set-back with payment terms deteriorating compared to the previ- ous year. Businesses took 53.2 days to settle their accounts during the September quarter, a deterioration of 1.1 days compared to the same quarter of last year. Payment terms now exceed the standard 30 day term by more than three weeks and remain above pre-crisis levels. This is not just being expressed as a minor inconvenience by those interviewed. Quoting directly from this report “…this trend of delinquent payment is hitting the cash flow of firms, with 50 percent of executives noting negative impacts stemming from their slow paying customers”. It seems then that there may be sections of the economy suffering a squeeze that isn’t necessarily reflected in the official unemployment figures? Turning to insolvencies, the international legal practice, Norton Rose, released a report in October on the ongoing im- pact of the global financial crisis. Worldwide in both its sampling and its findings, in relation specifically to the Australia, they report an expected significant level of insolvencies in the small to medium sized business sectors in the next 12 months. Retail, aged care, property and infrastructure were sectors specifically mentioned as being vulnerable. Again coming back to the dollar, allow me to quote directly from one of their local Partners “there is continued upward pressure on interest rates and while the new found strength of the Australian dollar may deliver a windfall to some, it will be catas- trophic for others, particularly if they have not hedged adequately." Impact on Hiring Practices Back in late 2009 the Australian Psychological Society’s College of Organizational Psychologists (COP) were warning that those businesses that didn’t communicate well with employees during the GFC damaged the working environment for staff that remained, eroding both loyalty and trust. Research does show that companies that downsized significantly subsequently experience very high voluntary turnover rates. A spokesperson at that time, Mr Beames, presciently stated that going forward, businesses would be cautious in their hiring practices. To use his words “…there is still a lot of uncer- tainty and volatility out there so people will be conservative when it comes to investment and expenditure, including on staff.” A recent survey by the professional services firm Resources Global Professionals affirms this forecast finding that be- cause of the GFC, Australian companies are looking to hire in professionals on a project basis to compensate for the lack of in-house staff. They report that 57% of consultants who work on a project basis have experienced a greater de- mand for their service, (compared to 78% experiencing less demand in 2009). Quoting directly from their Asia/Pac Man- aging Director, Jacinta Whelan, “an ongoing trend towards very lean core teams with a freeze on permanent hires means companies do not have spare capacity when a project need arises, so they bring in consultants as and when they are needed.” As to future hiring intentions, the waters are still somewhat muddied. The results of the Hudson “Employment Expecta- tions Australia” survey (another October release) stated that the proportion of employers planning to increase their per- manent staff levels declined from 40.6% to 39.3%, the proportion intending to hold headcount steady rose from 53.7% 55.0% and the proportion looking to reduce headcount increased fractionally, from 5.7% to 5.8%. The rival company Manpower’s Net Employment Outlook Survey released a month earlier projected that: 27% of employers planned to in- crease staff in the 4th quarter, no change from the last quarter figure; 7% planned a decrease, up 1% from the previous quarter; and, a stable 66% that planned no change. If there is one takeaway here, it’s that most employers are taking a “steady as she goes” approach, watching and waiting to see how global and local factors impact the economy.