17 Jun 2011

The budget forecasts are predicated on assumptions of GDP growth made by Treasury around the investment by resource producing companies and sustainable per ton, record achievable prices for commodities-mainly from China.

The March negative GDP figure demonstrated that any interruption to production and shipping of our resources, in this case, coal from Queensland due to the floods, can have a devastating effect on the economy. Another example is the self imposed cancellation of live cattle exports to Indonesia with the potential to seriously impact the viability of the cattle industry and regional and rural Australia dependant businesses, such as the trucking, broking and feed industries.

At the same time, a sensitivity analysis on the non-resource sector shows that businesses are struggling. This begs the question. What action can we take as a nation if any, to mitigate the serious impact on the economy at large, of a collapse in the demand/prices for our commodity exports and the consequences for families and the nation with regard to income, financial pressures and employment?

I remember in 1961 when in April, a pound (about half a kilo) of wool cost one pound (now $2 but worth a lot more in buying power then), but by June -only one shilling (10 cents). Yes-it can happen!

If we look at the non-resource sector, retailing and manufacturing are struggling as in my view; the nation has over-invested in retail and made investment in manufacturing unprofitable. Tourism is in serious trouble with the high dollar with no relief in sight given the disastrous US economy.

Retailers have cut their customer service personnel to the bone and outlets are bountiful. Retailers are now facing serious competition from overseas direct sales via the internet, a situation which I predict will force many retailers to close by 2015 as internet sales grow from 1% to 10% of total consumer sales.

The publicity around the GST free under $1000 direct consumer import opportunity has spurred the growth in this new competitive sales outlet by the current young “alphabet” generation (a Mondism for X’s and Y’s) who are very comfortable with buying direct from overseas via their 4G iphone after checking out the Australian price at their local shopping centre.

Manufacturers have been forced to try to compete with imports by becoming innovative and efficient, moving to capital-intensive solutions to avoid ever-increasing local labour costs.

Manufacturing is on life support

The rise in the A$ combined with wage-push pressures driven by collateral damage associated with the demand for labour in mining and related industries has put manufacturing in this country on life support.AusIndustry was designed to assist businesses but the current process requires businesses to compete with each other to win assistance. I think it should be the reverse.

Ausindustry should be going to every business and asking them-what can we do for you? As this is unlikely to happen, I cannot see that manufacturing can be the Plan B when the mining industry returns to normalized earnings. 

Services have grown due to the fact that we live in one of the most complex regulated nations on the planet which means that we continue to have an expansion in government agencies and in the private sector with accountants, lawyers and administrators called on to assist business to meet non-productive and costly compliance and other obligations.

Overseas outsourcing is growing

However, there is now a trend to outsource business processing labour services overseas in order that Australian businesses can mitigate this non-productive expense and stay profitable. With the advances in web enabled international data transfer capability, we will see growth in the use of off-shore BPO’s. Historically and traditionally, labour and capital are engaged as adversaries. However, there is now a third player-international labour markets.

Multi-nationals and now other medium to large businesses are adopting a world approach to providing call-centre and BPO services with the (low) cost of labour as the key driver for the labour engagement model decision. This emerging internationalization of business decisions is in my view the true competing adversary for Australian business and our workforce.

Whether it be by purchasing imported goods or by direct labour hire for business processing services and eventually I believe professional services, this changed environment means that not preparing for a Plan B will leave Australia very vulnerable to economic collapse via the forces of quick reacting and unforgiving international markets.

A Carbon Tax-The Death knell?

The impact of the cost of Australian labour for Australian business is compounded by the foreshadowed Carbon tax impost that without a similar global impost will likely result in further closures of the remaining Australian manufacturing businesses currently on life-support.
 
Even if every business was 100% compensated, the country still has to bear the administrative cost of the carbon tax, a cost that Government is likely to burden and pass on to business.

The Budget focuses on training. I believe that it is unfruitful to apply taxpayers’ money for “training” without a plan (what I call Plan B) to promote and develop competitive productive businesses to employ an Australian workforce in the non-mining sector.

When in doubt, look to the Bible. The seven good years were followed by the seven bad years.

I am sure that we all look forward to hearing policies from all the powers that be –actual and potential, that promote a Plan B. Australia sorely needs it at this critical juncture in our nation’s history.

Written by David Mond, Managing Director at Recoveries Corp