The RBA must cut rates - the human cost is too high

1. BHP-Anglo American deal on tenterhooks

2. Lendlease saga a lesson for Australian business

3. AI won't save the world, yet

4. Lower corporate tax rate is better than Future Made in Australia

THIS WEEK'S BIG STORY

The Reserve Bank must cut rates - the cost of housing is hurting those that can least afford it

Governor Michele Bullock has said the best way for the Reserve Bank to help with the cost-of-living crisis is to get a lid on inflation. And in the long term that's true. But it also needs to worry about the short term - the people literally living in cars. It is possible to have a half way point. Lower rates now, and more slowly over the medium term, rather than having to cut rates quickly at some point in the future because the economy has crashed. The European Central Bank is taking this option. Any relief would be welcome.

Why it's time to cut rates

It was only this week that it really hit home how poorly the consumer is doing. Retail sales, per capita, are at their lowest level in two years, according to the ABS. A recent Commonwealth Bank study shows that, based on its 7 million customers, younger Australians who rent or have a mortgage are doing it much, much tougher than older Australians. They are now cutting back not just on luxuries, but on necessities as well, such as insurance. People are hurting, and so is business. The crisis has gone beyond anecdotes to data. 

What the RBA says

The economists tend to win, at least inside the Reserve Bank, and the next quarterly consumer price index release isn't until late July. (There are monthly releases - one is due as we release this newsletter - which will give an indication of what's going on.) It means the Reserve Bank will wait until at least August, but probably later to even talk about it publicly. But we are in the middle of a crisis. The Reserve Bank needs to look beyond the numbers and look at the human cost. It should cut rates as soon as it can.

Rates are just a start

The need for housing is the other big part of the puzzle. A kick-start to the housing cycle is to lower interest rates. But it is a medium term fix. The government has a plan to build 1.2 million homes over the next five years. Currently the pace is about half that level. The short term answer is much harder. More people in each dwelling? More temporary accommodation? Using short term accommodation for long term housing (vacant hotels etc)? I don't have an answer for it, but something, anything needs to be done.

What's likely to happen?

BEST OF THE WEEK

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BHP's $75b pursuit of UK-based Anglo American comes to a head as another Australian company, Lendlease, pulls back from its own global ambitions. Todd Hoare from LGT Crestone tells Sean Aylmer why some Aussie companies thrive on the world stage, and some just can't.

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Cre8 Cre8, via TikTok on Telstra's woes, including its share price hitting a three-year low:

"Telstra has been dying a slow death since competition arrived with Optus. They have a legacy telco mindset beset with incumbency and arrogance. They can’t fix it with outsourcing customer service. So sad."

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Thank you for reading my opinions on the week's biggest stories.

- Sean Aylmer

BHP's $75 billion bid for UK-based Anglo American remains alive - just - with the Big Australian having until tonight (local time) to make a final offer. Media reports today suggest BHP wants another week-long extension to work on the proposal. The sticking point isn't money. It is the structure of the deal. Under the BHP proposal, Anglo is required to spin off its majority stakes in two South African miners before being purchased by BHP. Anglo says this creates too much risk for its own investors, and BHP should share some of that risk. Anglo has deep political and social ties in South Africa, and BHP, it appears, deems the sovereign risk in South Africa too great. A week ago it looked like BHP and Anglo were heading towards a deal. This morning, that looks less likely. 

One-time blue chip Lendlease has dumped its aggressive overseas expansion business, writing down nearly $1.5 billion in investments in its construction and development operations to focus on Australia. It is a grand reverse ferret for the iconic company, and chair Michael Ullmer and CEO Tony Lombardo. It demonstrates that not many Australian companies are able to transplant their business models offshore, and make them work. The banks haven't been able to do it. Nor most of the retailers. Some of the commodity players like BHP and Rio have successfully bought assets offshore but they operate in a global market. The tech sector fits into the 'global market' category also. Domino's Pizza has aggressively expanded into Europe and Japan, and while store numbers have soared, profits haven't always followed. Some of the health companies like ResMed have done well, though CSL's $17 billion purchase of Swiss-based Vifor Pharmaceuticals is yet to pay dividends. The moral of the tale is that in most industries, business is local. 

In the convenience store market - think 7-Eleven, Ampol, BP and Coles Express - more money is spent on grocery items than on petrol. Food and beverages account for about $6 billion in sales each year, and non-food sales, like fuel and tobacco, account for $4.3 billion, according to the Australian Association of Convenience Stores. These convenience stores are growing sales faster than Woolworths and Coles, and food and beverages turnover last year grew at a whopping 12.6 per cent. There are now close to 7,400 convenience stores across the country. Small business is becoming big business.

The federal government has made much of its Future Made in Australia policy. It has invested $470 million in a quantum computing company, promised help to the solar panel and batteries industries, and given tax production credits for critical minerals and hydrogen to kick things along. Canberra is picking winners, or at least what it thinks will be winners. A far better option is to let the market sort out the winners and losers. Lower the corporate tax rate, as industry minister Ed Husic suggested this week. That will incentivise local and international corporates to invest in areas where they think Australia can be a winner. It will be corporate money, not taxpayer money, chasing winners. And companies will do it more efficiently than government. It is that simple.  

Almost every company on the ASX is now talking about artificial intelligence and how they are going to incorporate it into their business. They can't afford not to, lest investors sell their stock. We hear that AI is going to replace CEOs, and change how we think, and boost productivity. It seems to be the answer to all our problems. Commonwealth Bank boss Matt Comyn brought a little levity to the debate this week when he said the country's largest bank is using generative AI to improve the customer experience, but it is only part of the solution. He said we don't exactly know what skills are required for AI to work, and we need to distinguish between the hype and the reality. Essentially he said hasten slowly. Comyn is right. For most businesses, AI will be a fast evolution, not a revolution. 

5. The rise and rise of petrol stations and convenience stores