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Friday, May 04, 2012 2:05 AM

Spotlight Australia: Collapse in Service Sector; Unrelenting Discount Wars; Catastrophic Decline in Profits; Stranded Merchandise in Warehouses

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Australia in in grim shape. Retailers are going under, home prices are sinking, and there is an enormous collapse in the entire service sector.

Collapse in Service Sector

Markit reports Australia Services Sector Slumps in April


  • The latest seasonally adjusted Australian Industry Group/Commonwealth Bank Australian Performance of Services Index (Australian PSI®) slumped by 7.4 points to 39.6 in April (readings below 50 indicate a contraction in activity with the distance from 50 indicative of the strength of the decline). This was the lowest monthly reading since March 2009.
  • The sharp fall in the Australian PSI® was driven by declines in the sales and new orders components of the index, which are now both at their lowest levels in almost three years.
  • Reports of weak trading conditions were widespread across all services sub-sectors and all states.
  • Consistent with these reports and with the latest weakening in Australian inflation (with headline inflation just 1.6% p.a. in the March quarter), the input prices and average wages and selling prices indices are now back at or below the levels seen during the Global Financial Crisis.

The sharp fall in the Australian PSI® was driven by especially large declines in the activity indices of the finance & insurance, personal & recreational services and health & community services sub-sectors.


  • On a seasonally adjusted basis, new orders contracted further in April.
  • The new orders sub-index fell by 11.9 points to 35.8, which is similar to the levels seen following the Global Financial Crisis in 2009.
  • On a non-seasonally adjusted basis, new orders declined across all service sub-sectors in April, with particularly sharp declines reported in the health & community services and personal & recreational services sub-sectors.
Price Squeeze

Check out the enormous margin squeeze on Australian service sector businesses.

click on chart for sharper image

Input prices have risen for 110 consecutive months and wages have risen for 33 consecutive months, but sales, new orders, and selling prices have collapsed.

Catastrophic Decline in Profit

The Age reports Retailers hit fast-forward in a race to the bottom
THE unrelenting and deep discounting war being fought in the retail sector has notched up its second victim in a week, with Harvey Norman revealing its pre-tax profit slumped 44 per cent in the March quarter.

Sales for the first nine months of this financial year have fallen nearly 7 per cent.

Only last week, rival electronics and entertainment retailer JB Hi-Fi - which released its own disappointing sales and profit forecast due to the double punch of price deflation and price competition - named Harvey Norman as one of the main culprits of the race to the bottom.
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Yesterday, Harvey Norman said the technology category continued to be challenged by declining average selling prices, with global sales falling 6.7 per cent to $4.39 billion for the nine months to March 31.

Comparable-store sales, which take out the contribution of new stores, slipped 6.6 per cent.

Australia, the company's key region, led the decline, and showed a worsening trend through the nine months. First-quarter sales were down 2.9 per cent, but that accelerated to a 10.2 per cent fall in the second quarter, and sales in the third quarter were down 9.2 per cent.

Third-quarter, like-for-like sales were down 7.9 per cent in New Zealand, 5 per cent weaker in Slovenia-Croatia and 1.3 per cent stronger in Ireland.

The knock-on effect to pre-tax profit has been catastrophic.
Stranded Merchandise in Warehouses

Please consider Freight firm fails at cost of 1000 jobs
RETAILERS and building suppliers across the country have been left with large amounts of stock stranded in the warehouses of collapsed transport firm 1st Fleet.
The express freight and warehousing company yesterday sacked its entire workforce, of 600 permanent employees and 400 sub-contractors.

It collapsed with debts worth tens of millions of dollars, triggered by the withdrawal of its lead banker, Coface, from its Australian portfolio.

Near midnight on Tuesday, night-shift workers at company depots were confronted by the firm's administrators and security guards, who locked them out and changed the locks. In Melbourne, most found out they no longer had a job when they turned up for the 7am shift.
Neil Chambers from the Victorian Transport Association said the economic climate for transport and logistics companies was as bad as during the 2008 financial crisis. "1st Fleet is almost like the tip of the iceberg," he said, with wafer-thin margins sending small transport firms to the wall.
RBA downgrades Australian Growth Forecasts, More Rate Cuts Likely

The Australian reports RBA downgrades Australian growth forecasts, more rate cuts likely
THE Reserve Bank of Australia dramatically downgraded its growth forecasts for the Australian economy, sparking the prospect that more interest rate cuts could be ordered in the next few months.

In its quarterly Statement of Monetary Policy, the RBA said that the domestic economy would now grow by just 2.75 per cent by June, down from its forecast of 3.5 per cent delivered just three months ago.

The economy is then predicted to bounce back slightly to 3 per cent by the end of 2012.
The RBA has also softened its inflation forecasts, which economists predict will likely bring on more interest rate cuts.
Not Dramatic Enough

I have no idea what the RBA is smoking but "growth" is not in the picture, nor is a year-end bounce.

Does the RBA even believe what they are saying? If they did, they would not have cut by a half, surprising nearly every economist in the country.

Alternatively, they are monetarist clowns who actually believe they can fine tune the economy with monetary policy even though the enormous property bubble proves otherwise.

Australia in Recession

Australia is now in recession and it will be a long, harsh one, no matter what the RBA does or doesn't do. Retail prices are too high, wages are too high, real estate prices are too high, and belief in policy makers is too high.

Many Australians have been emailing me for years that Australia is recession proof., that housing is in short supply and Chinese exports will keep the economy humming.

Reality is about to set in big, big-time.

Mike "Mish" Shedlock
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