Today’s Fin Review (8 November 2011) quotes some interesting numbers on how a consolidated Europe would look in economic terms.

The Financial Review attributes this information to Paul Sheard of Nomura.

So the thesis put forward is that if Europe were to further integrate their economy, which is the path it is currently taking, it would, far from current appearances, in fact be economically sound.  And with the current measures being inflicted on the weaker countries by the stronger (primarily Germany), one could imagine a future where a United Europe was an economic powerhouse.

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Accounting firm Ernst & Young have published a global report on entrepreneurialism ahead of the G20 Young Entrepreneurs Summit next week.

The report Entrepreneurs Speak Out, highlights five key pillars to build a successful enterprise environment: “entrepreneurship culture”, “education and training”, “access to funding”, “regulation and taxation”, and “coordinated support” between the different public agencies involved in facilitating and supporting entrepreneurship within a country.

With most developed economies around the world facing years of anaemic growth at best, encouraging people to take risks and create new enterprises is more important than ever.

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So with Australia’s carbon tax finally getting through parliament (it still has to get through the upper house, though that is expected to present few problems with the support of the Greens), we can now turn our minds to the implications for Australia’s small businesses, the engine room of our economy.

1. The first thing to note is that the carbon tax doesn’t apply directly to small business.  It only applies around 500 of our countries biggest polluters.  Of course the expectation is that these large business will then pass on in higher prices, the impact of the tax, so that the cost will filter through the economy.  However in the context that small businesses already have too much paperwork to do for the government, it’s nice to know this doesn’t add to our burden.
2. Small business will be able to write-off up to $6,500 of asset purchases, up from $1,000 now, thereby bringing forward the tax deduction for these assets.  There are some other improvements to the write down of vehicles from 2012/13.
3. The tax free threshold for individuals will rise from $6,000 now to $18,200 in 2012-13, then $19,400 in 2015-16.  For many micro-businesses and business that income split, this reduction may offer some savings.  Note that because of other changes they will make to the tax scales, people earning more than $80,000 will be worse off.
4. There are few details, however the Clean Technology Program may provide opportunities for small business, particularly in the consultancy space.

I wonder if in 10 years time we look back on this and wonder what all of the fuss was about.

Paul Benson

Guidance Financial Services Pty Ltd – Specialist financial planning advice for business owners and the self employed.

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For most of the past year the Reserve Bank has been telling us that Australian interest rates will need to rise because major mining investment will lead to inflation problems.  Then in the past couple of months, as financials troubles in Europe come into sharper focus, and economic growth in the US looks shaky, the RBA backed off on this stance, with many in the market anticipating the next move in rates would actually be down.  Indeed I read a report from Goldman Sachs only yesterday that forecast two interest rates cuts between now and the end of the year.

Then yesterday, GDP data came out which showed Australia growing quite strongly.  Indeed the June data was the strongest quarterly growth rate in four years.  Such strong growth fits with the RBA’s original thesis that rates will need to go up at some point.

So where does that leave us?  Internationally, things are grim, (for the developed world), yet locally conditions are strong (courtesy of the developing world).  Property prices are down, share markets are down, yet unemployment remains at record lows and recent company profits were better than had been expected (BHP made over $60million per day in profit last year!).

The safest bet would seem to be “steady as she goes”, but I’m glad I’m not the Reserve Bank governor.

The Age on Saturday (27/8/2011) had a great article by Stuart Washington, which contained an analysis from the current company reporting season of those companies with optimistic outlooks, compared to those with the opposite view.

Of particular interest:

• 18 of the 50 largest Australian companies cite the continuing resources boom, and growth in Asian markets as key drivers for growth.
• Of these companies, 70% indicated they had a positive outlook for the year ahead.
• 11 companies reported that consumer confidence was their key driver. 
• Of those businesses, 80% indicated their outlook was challenging.

The most common view is that China’s industrialisation, and therefore the current resources boom, has 20 years plus to run, based largely on the experience of Japan when it industrialised.  If this prevails, the current winners will grow and prosper, whilst the losers will continue to decline.  One day the resources boom will end.  Eventually the resources are all dug up.  Let’s hope as a nation we have an economy that can survive without mining when that time arrives.  Until that time though, can you afford to not ride the miners jet-stream?

With concerns growing globally about the political impasse in the United States, the Australian dollar has taken another step up to now be trading above US$1.10 for each Australian dollar.  It was only a few short years ago that one Australian dollar would only buy you 50 US cents.

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With the Australian dollar strong, online retailing will continue to flourish, prolonging the pain being felt by Australian retailers.  Exporters will find it tougher to compete both locally against cheaper imports and on the world stage, local tourism operators will struggle as it becomes cheaper for Australians to holiday overseas, and more expensive for overseas visitors to come to our shores .  And for investors, your international investments just became worth a little less when converted back into Australian dollars.

For all the negatives that a strong dollar brings to our economy, I’d still rather be in Australia with unemployment at about 5%, minimal government debt (at the federal level at least!), and a budget projected to be in surplus within 2 years, than face the woes of residing in the United State right now.

In working my way through the reporting on Australia’s new Carbon Tax I’ve found lots of references to the fact that the tax free threshold for individuals will rise to $18,200, but not much on the other tax rates.

Thus I have obtained the following information from the Australian Government’s Treasury web site for your information.  Two aspects that I find interesting here:

1. The “Effective tax free threshold” is far less of an increase than the headline change from $6,000 to $18,200 suggests.  This is because they have fiddled with the Low Income Tax Offset (LITO).
2. Some rates have risen.  The first tax rate has risen from 15% to 19%, and the second tax band from 30% to 33%.

Significantly, if you earn $80,000 or more, you get no compensation – the increases in the mid level tax bands offset the gains from increasing the tax threshold – so this is the portion of the population paying for the change. 

No doubt there will be plenty of analysis to come on Australia’s Carbon Tax arrangements.

Source: http://ministers.treasury.gov.au/DisplayDocs.aspx?doc=pressreleases/2011/081.htm&pageID=003&min=wms&Year=&DocType=

Malcolm Maiden in this weekend’s Age (2/4/2011) has written an excellent article on the current strength of the Australian dollar and in particular how a reversal of the current upward trend might unfold.

Maiden observes that the current AUD strength is due to a combination of factors, including record high terms of trade (reflecting high commodity prices), weakness of the US dollar, and interest rate differentials.  It is the interest rate differentials aspect  where he identified a precedent, from strengthening dollar to a weakening one.  The difference between Australian and foreign (especially US) interest rates impacts the Australian dollar because of something known as the “carry trade”.  Institutional investors borrow in a country with low interest rates, and then invest in the country with high interest rates.  Currently this works very nicely between Australia and the United States, since our official rate is 4.75% whereas the US official rate is between zero and 0.25%.  A consequence of this trade movement is that the Australian dollar is demanded, pushing up the exchange rate.

So what happens when that interest rate differential reduces?  The US economy is improving and at some point US official rates must rise.  As a precedent Maiden looked at 2004.  From 2000 to mid 2003, UD rates had fallen due to the Tech Wreck and 9/11 from 6.5% to 1%.  In January 2004 the Fed indicated for the first time that it was ready to move on rates, despite leaving rates on hold at the time (it didn’t actually start putting rates up until mid year).  None the less that change of sentiment was enough to have a noticeable impact in the AUD/USD exchange rate which fell from almost US80c in mid February 2004 to US68c by mid-May.

For savvy investors there are gains to be made on a falling Australian dollar.  Guidance clients will certainly do well.  Has your financial planner got you appropriately structured to make the most of this move, whenever it comes?

With very high levels of uncertainty at present causing investment markets to retreat, one pleasing aspect has been the verification of a strategy we have been implementing for Guidance Financial Services clients.  Our thinking for some time has been that the recent high Australian dollar has been fuelled by a combination of high commodity prices and a weak US dollar.  We have felt that in the event of market turmoil, commodity prices would probably fall, and the US dollar was likely to gain popularity as a safe haven.  The combined effect of these moves would be for the Aussie dollar to fall against the USD.

Through buying investments in the US (our preference has been exchange traded funds (ETF’s) such as iShares), any drop in the AUD will result in an increased value in our international assets when converted back into Australian dollars, providing a natural cushion in the event of a market fall.  For this reason we have been working hard to gain our clients unhedged international share exposure over past months.  Thus in all of the market turmoil currently being experienced with the problems in Libya, the Middle East, and now of course the earthquake and nuclear worries in Japan, the Aussie dollar has indeed fallen, and the value of our clients portfolio’s have to some extent at least been protected.  As they used to say on the A-Team “I love it when a plan comes together”.

The Australian Bureau of Statistics released data yesterday on businesses initial estimates for private capital expenditure in 2011-12.  Mining companies advised they planned to increase spending by a massive 55%, leading to total investment expenditure of $133billion for the Australian economy overall, a rise of 30%.

It is important to caution that these are estimates of intentions, however the magnitude of these plans cannot be ignored.  Demand for services such as engineering, equipment, and the skilled workers needed to physically get the work done, will no doubt be in short supply, with costs inevitably rising.  This is what the Reserve Bank of Australia is worried about.  Will the wages pressure that flows from these plans lead to inflation?

The report found the resources sector was on track to account for about 57% of total private capital expenditure based on the 2001-12 estimates.