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Business health before the Budget

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by Peter Switzer

Ahead of the May Federal Budget, more economists are now thinking the month could usher in the overdue pause by the Reserve Bank with their rush to the so-called normal level of interest rates. And it therefore makes it timely to see what parts of the Aussie economy are doing well, and those which are feeling the pressure of rising rates, to see if Treasurer Wayne Swan could come to the rescue of the battling businesses out there at the moment.

Less than expected

In good news, the overall budget deficit is likely to be less than expected. The rolling annual budget deficit for January (twelve months to January) came in at $45,957 million, well below the estimate for the 2009/10 financial year of $57,585 million. This suggests Swan should be able to crow that the news last year of a big, scary deficit has come in better than expected.

This has happened because the country’s unemployment rate peaked at 5.8 per cent instead of the predicted 8.5 per cent. This means less people lost their jobs and so more taxes were collected and less Aussies lined up on the dole queue.

Property a tax target?

In the property sector and according to the RP Data-Rismark Hedonic Australian Home Value Index prices rose by 1.4 per cent in February on top of an upwardly revised two per cent in January. And now home prices around the country are up 12.7 per cent on February last year. That’s the fastest pace in 25 months.

Meanwhile dwelling approvals dropped by 3.3 per cent in February, with private sector apartments and houses causing most of this. However, dwelling approvals are up 34.2 per cent on a year ago.

At the moment the sector is doing okay but home loans are falling now and that could mean there will be some headwinds for the sector later in the year. In fact, new owner-occupier housing loans fell for the seventh time in eight months in February.

I don’t think the Budget will hurt homeowners as this is an election year but I do worry about the Henry Tax Review which comes out before the Budget — it could target property with taxes!

More cars

Car sales are going well with new car sales surging in March. In total 94,744 new cars were sold over the month and this figure was up a record 25.2 per cent on a year ago. This is the highest monthly sales total in nine months.

By the way, we love 4WD’S with 21,643 of these units sold in March and that’s the highest reading ever.

I can’t see Budget help nor harm for this sector.

Budget help

On the other hand, retailers are ringing up tough times. The Aussie consumer pared back on spending, with retail sales falling by 1.4 per cent in February. Department stores, retail chains and other large retailers recorded trend growth of just 0.1 per cent in February – this is the worst reading in almost 16 years.

Tourism businesses have been buffeted by rising interest rates and an irrepressible dollar that defies gravity. This makes it hard for these exporters and in fact, most non-resource exporters would be hating the rising dollars.

The Budget should look to help businesses in these sectors but generally Budgets don’t single out help for specific small business sectors, apart from regional- or agricultural-based ones.

On the other hand, companies that rely heavily on imports will love the Oz dollar on steroids.

Assistance from the Budget unlikely

Businesses generally are feeling the combined heat of rising rates and a higher dollar at a time when banks are not flushed with funds. The consequence is falling business loans.

“Business credit fell for the 13th straight month, down by 0.1 per cent in February,” said Craig James, chief economist at CommSec. “Business credit is down 7.6 per cent on a year ago.”

The Budget is unlikely to help businesses here as the Rudd Government did provide generous investment allowances last year. In addition they haven’t had great publicity helping the insulation industry and the builders in the school hall business!

Resources, infrastructure and construction

Obviously the resource sector is doing well, thanks to China, and I expect the Budget will go after the mining companies for higher taxes to help the Government reign in its bigger deficits.

Businesses in the infrastructure and construction sectors are in for a good time ahead.

“Australia is experiencing its greatest construction boom with over $130 billion worth of construction projects underway,” said James.

That said, the Budget could cut back on some promised spending, however I doubt it.

The result?

Undoubtedly the big Budget drama ahead could be significant if Swan plays politician and does not show us notable cut backs in spending and a falling deficit. If this happens, the RBA could keep raising interest rates all the way to the Federal Election, expected in November 2010!

For advice you can trust, contact Switzer Financial Services.

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Published on: Tuesday, April 20, 2010