The Australian economy is on its knees

1. Fair Work Commission decision is fair

2. Shareholder activism takes centre stage

3. Northern Minerals, Jim Chalmers and mysterious Chinese buyers

4. NDIS debacle

THIS WEEK'S BIG STORY

The Australian economy is on its knees

Australia has long had an enviable reputation for avoiding economic recessions. We couldn't dodge the 2020 COVID recession, but otherwise our economy has not shrunk for two quarters in a row since 1991. Very few other developed nations can say that. We are not in recession officially, but that is only because of immigration. If you measure growth on a per capita basis, Australia is going backwards, and has been for five quarters.

What is the growth rate?

Economic growth for the three months to the end of March came in at 0.1 per cent, according to the Australian Bureau of Statistics. That is the lowest rate since the pandemic and follows a 0.2 per cent expansion in the December quarter. Outside COVID, it is the worst six-month performance in decades. For the full year to the end of March, growth came in at 1.1 per cent. 

How bad is it?

Stage 3 tax cuts kick in on July 1 and that will help. Interest rates are likely to remain high for the rest of this year and into next year. But ultimately they will start coming back down, once inflation looks like it will fall into the Reserve Bank's target range. Housing is a major problem because there just isn't enough supply to rein in price rises in the short term. This government has shown a propensity to focus on energy costs to help people, with rebates included in the budget. Economies do eventually shift back into equilibrium, but it might take a while.

What is the reason?

Consumption is in the toilet. Housing costs, expensive electricity and petrol, and insurance premiums are taking up a bigger proportion of people's take home pay. Higher interest rates are working by slowing spending. It is very tough on main street at the moment, with younger Australians struggling most. Consumption makes up the majority of economic growth, more than investment, government spending and trade combined. So when consumption slows, economic growth pulls back. 

What happens next?

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"$33/week? Only $67 a week short of covering the rent increase."

 

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

- Sean Aylmer

This week's Fair Work Commission decision to award 2.6 million minimum wage and award-reliant workers a 3.75 per cent pay rise did something rather unique - satisfied everyone. Well, not everyone. The small business community is up in arms saying on top of the 5.75 per cent increase last year, wage costs in industries like hospitality, retail and services, where labour is about half operational costs, are much too high. But otherwise the ACTU says any wage increase is a good increase. The gist of the employer groups' argument is that while they were aiming for a smaller rise, the increase is acceptable. The federal government doesn't want minimum wages to go backwards in real terms, when you take inflation into account. Inflation is tracking around 3.6 per cent so real wages aren't going backwards. And economists say anything under four per cent won't be overly inflationary, thus helping the Reserve Bank get price rises in check, and ultimately leading to lower interest rates. Kudos to the Fair Work Commission.

For far too many years, large shareholders have hidden behind the concept of 'engagement' rather than 'activism'. Keep in mind that super funds and other institutional investors are investing the money of individuals like you and me. The big funds, if they didn't like management or strategy, would 'engage' behind closed doors, and most of us would be none the wiser, even though we are providing the money. But that is changing. This year is the biggest for activist campaigns since 2013 when counting began, according to Bloomberg Intelligence. There have been 27 campaigns launched on listed companies - more than double the average. None is more high profile than Lendlease, where active shareholders eventually forced out the chair and made the CEO change strategy. But the all-time loudest active campaign was by tech billionaire Mike Cannon-Brookes when he blocked a demerger of AGL in 2022. Activist campaigning might be tougher for management and boards, but it is more transparent for shareholders, and that is who executives are accountable to. 

This week Nvidia, the world's premier chip maker, announced a new microchip, known as Rubin, to replace the old one. But the old one, known as Blackwell, was only launched three months ago and is still in production. Blackwell hasn't even left the factory floor yet. It is difficult to know whether Rubin is good marketing, a necessary innovation, or money-wasting hubris. There is no company hotter on Wall Street than Nvidia. Its share price is up nearly 200 per cent since late last year, and at $US2.86 trillion, its market value is only slightly lower than Apple ($US2.98 trillion). Demand for powerful chips used in artificial intelligence has driven the success. A major challenge for tech is how much energy AI and data centres need, putting pressure on electricity grids. Rubin is more efficient and is designed to partly address that challenge. The tech world moves fast, but to launch a new chip before the old one has left the factory floor? It sounds like hubris to me. 

This week's stories about rorts in the National Disability Insurance Scheme beggar belief. According to the person that should know - the scheme's integrity chief John Dardo - nine out of ten managers portray "significant indicators of fraud". He talked of dozens of examples where organised crime groups are abusing the system, including encouraging the use of NDIS money to buy drugs and alcohol. People are spending their NDIS money on cars and holidays. Payments involving plan managers were $5.7 billion last quarter. (The role of the manager is to plan with a participant the appropriate health services, and help access them.) It seems where there's money, there's an enormous potential to rort the system. It is a total mess, wasting taxpayers dollars and both sides of politics are responsible for it.    

There is a cracking story this week involving Northern Minerals, a little-known miner of dysprosium and terbium, rare earth minerals used in the production of high performance magnets, batteries and defence equipment. Chinese rare earths businessman Wu Tao bought 9.9 per cent of the company a few years ago. When he tried to increase his stake to 19.9 per cent, it was blocked by the Foreign Investment Review Board as not being in Australia's interests. Late last year other offshore entities began buying up stock. CEO Nick Curtis reported it to the FIRB, as he should, and Wu promptly tried to remove him as a director. This week federal Treasurer Jim Chalmers told four entities to sell down their holdings. The action effectively accuses Wu of buying up Northern Minerals stock via related entities. Such disposal orders are very rare in commercial businesses. Chalmers used his power to prevent a surreptitious attempt by a Chinese buyer to grab control of an Australian miner.

5. Nvidia's success breeds hubris

Huge response to Fear & Greed's TikTok about the $33 per week increase to the minumum wage

@officialnuts6

"I don’t want a pay rise, I want things to be more affordable. What’s a pay rise worth if prices increase as well?"