We look at a recent report on the future of retirement. There are some big issues on the horizon.
https://www.credit-suisse.com/about-us-news/en/articles/media-releases/credit-suisse-research-institute-publishes-study-urging-rethink–202001.html
"Intelligent Insight"
We look at a recent report on the future of retirement. There are some big issues on the horizon.
https://www.credit-suisse.com/about-us-news/en/articles/media-releases/credit-suisse-research-institute-publishes-study-urging-rethink–202001.html
Economist John Adams and Analyst Martin North look at the fallout from the current Coronavirus scare.
How are our politicians handling the emergency?
Given latest reports of 100,000 impacted worldwide, are they doing enough?
Today I want to consider the social impact of going digital, and the problems associated with financial stability in a disaggregated digital payments world.
More evidence I think that banning cash is clueless.
https://www.bis.org/publ/bppdf/bispap107.pdf
https://www.bis.org/review/r200123c.pdf
https://www.theguardian.com/us-news/2020/jan/24/new-york-city-ban-cashless-businesses-discrimination
https://www.rba.gov.au/publications/annual-reports/psb/2019/trends-in-payments-clearing-and-settlement-systems.html
A number of unanticipated events are haunting the markets, the swans are circling…
The latest edition of our weekly finance and property news digest with a distinctively Australian flavour.
Contents:
The Senate will hold a hearing in Sydney on 30th January 2020.
John Adams will be appearing to give evidence.
The hearing will be in public at the Portside Centre which is located at 207 Kent Street, Sydney NSW 2000.
https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019
If you think restricting cash has nothing to do with monetary policy and negative interest rates, then watch this.
We look at a recent CNN Business article looking at the Swiss.
Time to buy a safe?
[Recorded in a thunderstorm…]
Australia’s trend unemployment rate decreased to 5.1 per cent in December 2019, according to the latest information released by the Australian Bureau of Statistics (ABS) today.
This may be enough to stay the RBA’s hand in February, as the headline rate fell, and the jobs hours worked rose, though there was a disproportionate shift towards part-time work, and the underutilisation rate is also higher. In fact, the fall can be best linked to a falling participation rate as more chose not to work over the summer. So nothing here to really support signs of a stronger economy. Underutilisation among the 15-25’s is above 25%.
Employment and hours
In December 2019, trend monthly employment increased by around 18,000 people. Both full-time and part-time employment increased by around 9,000 people.
Over the past year, trend employment increased by around 261,000 people (2.1 per cent), which continued to be above the average annual growth over the past 20 years (2.0 per cent).
Full-time employment growth (1.5 per cent) was below the average annual growth over the past 20 years (1.6 per cent) and part-time employment growth (3.2 per cent) was above the average annual growth over the past 20 years (3.0 per cent).
“While there has been stronger growth in part-time employment over the past year, the underemployment rate is still where it was last December, at 8.3 per cent,” said Mr Hockman.
The trend monthly hours worked increased by 0.2 per cent in December 2019 and by 1.7 per cent over the past year. This was in line with the 20 year average annual growth of 1.7 per cent.
Underemployment and underutilisation
The trend monthly underemployment rate remained steady at 8.3 per cent in December 2019, unchanged over the past year. The trend monthly underutilisation rate also remained steady at 13.5 per cent in December 2019, an increase of 0.2 percentage points over the past year.
States and territories trend unemployment rate
The monthly trend unemployment rate increased in the Northern Territory, and decreased in Queensland and Tasmania in December 2019. The unemployment rate remained steady in all other states and the Australian Capital Territory.
Over the year, unemployment rates fell in Queensland, Western Australia, Tasmania and the Australian Capital Territory. Unemployment rates increased in all other states and the Northern Territory.
Seasonally adjusted data
The seasonally adjusted unemployment rate decreased by 0.1 percentage points to 5.1 per cent in December 2019, while the underemployment rate remained steady at 8.3 per cent. The seasonally adjusted participation rate remained steady at 66.0 per cent, and the number of people employed increased by around 29,000.
The net movement of employed in both trend and seasonally adjusted terms is underpinned by around 300,000 people entering and leaving employment in the month.
Westpac has announced the appointment of its new non-executive director and chairman-elect, who will play an integral role in the appointment of a permanent CEO following the resignation of Brian Hartzer. Via Australian Broker.
John McFarlane, scheduled to assume the role in February subject to regulatory approvals, will succeed Lindsay Maxsted and work closely with Peter King, current acting CEO.
McFarlane has more than 44 years’ experience in financial services, across retail and wholesale banking and markets, as well as in life and general insurance.
“This experience, coupled with his strong customer and employee focus, will be invaluable to Westpac as the organisation executes its strategy and implements its Response Plan for the AUSTRAC Statement of Claim,” said Maxsted.
“As chairman-elect, McFarlane will be responsible for appointing a permanent CEO, with an internal and external search process currently underway. In the interim, he will work closely with the acting CEO, Peter King and the board, to effect needed change.”
Most recently, McFarlane was chairman at Barclays in London over “the decade of challenge” following the global financial crisis.
“During his four years as chairman, the company was streamlined, repositioned and has sustainably returned to profit,” Maxsted said.
“Prior to this, he delivered a successful turnaround program at UK insure,r Aviva, a company similar in scale to Westpac.”
McFarlane also possesses a “deep understanding” of Australia’s banking sector, given his previous 10-year tenure as CEO of ANZ from 1997 to 2007, as well as 10 years passed as director of the Australian Bankers’ Association.
The newly named chairman has returned to live in Australia permanently and has dubbed the appointment “an honour”.
“People close to me know that on my return to Australia, I hadn’t intended to take another major leadership role. However, I’m passionate about the Australian banking sector, and I’m excited by the challenge of returning Westpac to its place as a leading global bank, following recent events,” McFarlane said.
“To some extent, the internal and external challenges ahead for Westpac are not dissimilar to those in my last five financial institutions, and I have therefore grown comfortable about my capacity to work with the board and management to effect the necessary change.
“Nevertheless, I’m sufficiently battle-hardened to realise things can be tougher than you think and that in banking, nothing is ever certain.”
McFarlane has communicated that the appointment of a “world-class” CEO can take time.
“In the interim, momentum is important. I will work closely with Peter King and the board to continue to make any changes necessary. People should expect to see positive change during this period,” he said.
“My focus initially will naturally be on resolving the company’s current issues but equally important, to position it as quickly as possible for long-term success. Fortunately, Westpac has wonderful core customer franchises, each with significant opportunity.”
We look at the tourism data to assess the impact on GDP, regional visits and the education sector. How much of the $60 billion contribution to GDP (fourth largest) could be impacted, and will a marketing campaign make any difference?
This week, the Australian Tourism Export Council told the Australian Financial Review that cancellations by tourists from large markets such as the US, UK and China was hurting the industry and could cost the country at least $4.5 billion by the end of the year. There have been mass cancellations, and bookings in some areas are down by half. And this may not be just a short-term blip, with pictures of the smoke last week in Melbourne, Canberra and Sydney all adding to the concerns potential tourists may have.
The hazardous ratings were worse than in many industrial cities around the world. And whilst Australia is a large country (it takes 5 hours or so to fly from Sydney to Perth) the bushfire impact is bigger than just the areas where bushfires are still burning. And the lasting damage to Australia as an environmentally sensitive country and worth a visit might be shot. In addition, it is estimated more than 1 million wild animals and birds may have perished and in some area’s species – like Koalas and Platypus are threatened with extinction.
The Government announced that they would spend $76 million dollars on marketing campaigns to underscore to international and interstate visitors that Australia is open for tourists to visit. The bulk of the money to be spent on overseas advertising. Prime Minister Scott Morrison said Australian tourism is facing “its biggest challenge in living memory”. And described the funding — drawn from the Government’s national bushfire recovery fund — as an “urgent injection” of funds for businesses impacted by the bushfire crisis.
The Government’s package includes $20 million for marketing to domestic travellers and $25 million for a global tourism campaign to advise international visitors that Australia is “safe and open for business”, as well as $10 million towards creating new attractions in bushfire affected regions of the country.
So today I wanted to look at the tourist data for Australia to see how important it is and to examine where the tourist dollar comes from, and where it goes to. And we need to look at both international visitors, and separately local visitors, including those from other states. Some of the reporting in the mainstream media have only told part of the story. Then I will try to estimate the potential impact.
According to data from Austrade, total tourism generated $149.6 billion dollars to the year to 30th September 2019. Within that, domestic overnight travel had 115.7 million visitors spending a record $79.1 billion, while foreign visitors generated $45.2 billion in income to the economy, up 4.7% on the previous year. This was generated from 8.7 million international visitors, up 2.5%, with an average spend per trip of $5,219.
Data published by TOURISM RESEARCH AUSTRALIA using ABS data shows that in 2018-19, total tourist consumption was $152.0 billion, which resulted in $60.8 billion in GDP to the economy which is 3.1% of the national total and employed 666,000 persons or 5.2% of the Australian workforce. Note though that this is a derived estimate, according to the ABS as we do not measure tourism directly.
In fact tourism is our largest service export, contributing $39.1 billion to Australia’s economy in 2018–19. This represents 8.2% of all goods and services exports – and places the industry fourth overall behind iron ore, coal and natural gas. But we actually have a tourist trade deficit, with visitors coming here – Exports of $39.1 billion from international visitors to Australia while Australian travelling overseas – Imports were $58.3 billion.
The tourist GDP contribution has been growing by between 5% and 6% for some years, and is up from around $38 billion in 2010-11 to $60 billion last year. This has seen tourism grow from a 2.9% share of national GDP to a 3.1% share.
So now let’s look in more detail at the tourist sector, and at international trade first.
Within the $45.7 billion, $17.1 million came from holidays, $13.2 billion from education, $7.5 billion from visiting family and relatives, $4.1 billion on business, $2.2 billion on business and $1.2 billion for other reasons.
Visitors from China accounted for $12.3 billion of spend, of which $3.2 billion was holidays and $7.1 billion on education. This came from 1.3 million visitors, with an average spend per trip of $9,235.
The United States was second, with $4.0 billion spent, of which $2.0 billion was for holidays and $300 million on education. This came from 771,000 visitors with an average spend per trip of $5,200.
Next was the United Kingdom with $3.3 billion spent, with $1.4 billion on holidays. And $1.3 billion on visiting family and friends, and just $68 million on education. We had 669,000 visitors from the UK and their average spend was $4,959.
New Zealand accounted for $2.6 billion in spend, of which $1.1 billion was holidays, 0.7 billion on families and friends and just $76 million on education. Interestingly they accounted for $1.3 million visits and their average spend was $2,032. That may tell you something about our Kiwi cousins!
Across the states and territories, NSW received $11.5 billion, of which $3.6 billion was for holidays, $4.7 billion for education and $1.4 billion for visiting relatives. The average spend per trip was $2,610. Of this around $1 billion was from regional NSW, mainly holidays at $381 million and education $362 million.
Victoria accounted to $8.8 billion, of which $2.3 billion was holidays, $4.0 billion education and $1.5 billion was visiting relatives and friends. The average trip was worth $2,810. Regional Victoria earned $594 million from international tourism, of which $249 million was holiday related from international visitors.
In Queensland, international tourism was worth $6 billion, including $2.8 billion for holidays, $1.7 billion for education and $830 million for visiting families and friends.
Within that Gold Coast generated $1.3 billion, including holidays at $755 million and education at $335 million, Brisbane was $2.8 billion comprising holidays $644 million and education $1.3 billion, and regional QLD generated $1.8 billion, of which holidays was $1.4 billion.
Turning to local tourism, that generated $79.1 billion, with an average spend of $684 a trip, and over an average 4-night stay. Of that $35.2 billion was holidays, $13.9 billion visiting relatives and friends, $17.8 billion business related and $12 billion other reasons.
Across the states, $23.2 billion was spent in NSW, with regional NSW collecting $13.9 billion, $16.5 billion in VIC, with regional VIC earning $7.1 billion, $19 billion in QLD with the Gold Coast generating $3.7 billion and Regional QLD $10.2 billion, $5 billion in SA, $8.5 billion in WA, $2.3 billion in NT, $2 billion in the ACT and $2.7 billion in Tasmania.
So a couple of observations, international revenue from education is more significant than from overseas people visiting, so it will be important to reassure potential students that Australia is safe and open for education services – to that end, the pictures of smoke in Sydney and Melbourne are extremely damaging when it comes to selecting a country in which to study, and as degrees in particular can take three of four years, this could create a long term hole in GDP.
Local travel by Australians can generate significant income, so focus on reassuming locals it is safe to travel to fire effected areas will be important, but many will likely stay away until the fires are out. As at today there are still more than 80 burning in NSW alone.
In fact, my read of Morrison’s announcement is its more to do with public perceptions of how he is handling that bushfires (after earlier bloomers), than really making a difference. For that we need to have the fires extinguished, and we need strategies to mitigate future risks. So, to me, $76 million is a pimple on the elephant and will make very little difference indeed.
But we can estimate the potential loss, bearing in mind more than half of tourists come over the summer period. So, apply this to the proportion of areas directly impacted overall, I get around $4 billion dollars in income lost. If you add in a broader swathe of cancellations to Melbourne, Canberra, Adelaide and Sydney, and assume a 5% reduction in education spend, I get an additional $8 billion in this financial year. Thus, if I put all the known data together, that $60 billion GDP could easily drop by $12 billion over the next year, and the impacts could run over 2021 and beyond. But to reemphasise the point there are indeed many areas of Australia still open for business and it’s a big country, but its going to be a hard message to communicate while the fires are still running.
https://www.tra.gov.au/domestic/domestic-tourism-results
https://www.austrade.gov.au/Australian/Tourism/News-Research-and-Publications/research
https://www.abs.gov.au/ausstats/abs@.nsf/mf/5249.0
https://www.adnews.com.au/news/where-the-76-million-tourism-marketing-bushfire-recovery-package-will-be-spent
The BIS – The Central Bankers’ Banker, has released a report “The Green Swan“, in which they discuss the issue of ” Central banking and financial stability in the age of climate change”. Specifically they warn that expecting Central Banks to do “Green QE” to mitigate financial risks relating to climate variation is unrealistic, saying that while banks in financial distress in an ordinary crisis can be resolved, this will be far more difficult in the case of economies that are no longer viable because of climate change. Intervening as climate rescuers of last resort could therefore affect central bank’s credibility and crudely expose the limited substitutability between financial and natural capital. This is more evidence of the pressures building to react to climate variability. Hence, climate-related risks are a source of financial risk.
They conclude: while climate change risk management policy could drag central banks into uncharted waters: on the one hand, they cannot simply sit still until other branches of government jump into action; on the other, the precedent of unconventional monetary policies of the past decade (following the 2007–08 Great Financial Crisis), may put strong sociopolitical pressure on central banks to take on new roles like addressing climate change. Such calls are excessive and unfair to the extent that the instruments that central banks and supervisors have at their disposal cannot substitute for the many areas of interventions that are necessary to achieve a global low-carbon transition. But these calls might be voiced regardless, precisely because of the procrastination that has been the dominant modus operandi of many governments for quite a while. The prime responsibility for ensuring a successful low-carbon transition rests with other branches of government, and insufficient action on their part puts central banks at risk of no longer being able to deliver on their mandates of financial (and price) stability”.
Now, let me add that I have read widely on this issue, and have looked at the data – I find the evidence for greater energy in the climate system convincing. In terms of the underlying causes, my view is some can be traced to natural variation, but this does not explain the correlations we are seeing, thus I have concluded that human activity is also adding to the problem. While we cannot control the natural variations, we can and should tackle that which we can address. Hence my stance. This is the biggest challenge we face, frankly. But the polarisation between “deniers and believers” is a false politically led dichotomy. This is not a religion!
David Wallace-Wells recently observed in The Uninhabitable Earth (2019), “We have done as much damage to the fate of the planet and its ability to sustain human life and civilization since Al Gore published his first book on the climate than in all the centuries – all the millenniums – that came before.”
The BIS says that climate change poses an unprecedented challenge to the governance of global socioeconomic and financial systems. Our current production and consumption patterns cause unsustainable emissions of greenhouse gases (GHGs), especially carbon dioxide (CO2): their accumulated concentration in the atmosphere above critical thresholds is increasingly recognised as being beyond our ecosystem’s absorptive and recycling capabilities. The continued increase in temperatures has already started affecting ecosystems and socioeconomic systems across the world but, alarmingly, climate science indicates that the worst impacts are yet to come. These include sea level rise, increases in weather extremes, droughts and floods, and soil erosion. Associated impacts could include a massive extinction of wildlife, as well as sharp increases in human migration, conflicts, poverty and inequality.
Scientists today recommend reducing GHG emissions, starting immediately. In this regard, the 2015 United Nations Climate Change Conference and resulting Paris Agreement among 196 countries to reduce GHG emissions on a global scale was a major political achievement. Under the Paris Agreement signatories agree to reduce greenhouse gas emissions “as soon as possible” and to do their best to keep global warming “to well below 2 degrees” Celsius (2°C), with the aim of limiting the increase to 1.5°C. Yet global emissions have kept rising since then and nothing indicates that this trend is reverting. Countries’ already planned production of coal, oil and gas is inconsistent with limiting warming to 1.5°C or 2°C, thus creating a “production gap”, a discrepancy between government plans and coherent decarbonisation pathways.
Changing our production and consumption patterns and our lifestyles to transition to a low-carbon economy is a tough collective action problem. There is still considerable uncertainty on the effects of climate change and on the most urgent priorities. There will be winners and losers from climate change mitigation, exacerbating free rider problems. And, perhaps even more problematically, there are large time lags before climate damages become apparent and irreversible (especially to climate change sceptics): the most damaging effects will be felt beyond the traditional time horizons of policymakers and other economic and financial decision-makers. This is what Mark Carney referred to as “the tragedy of the horizon”: while the physical impacts of climate change will be felt over a long-term horizon, with massive costs and possible civilisational impacts on future generations, the time horizon in which financial, economic and political players plan and act is much shorter. For instance, the time horizon of rating
Ominously, David Wallace-Wells recently observed in The Uninhabitable Earth (2019), “We have done as much damage to the fate of the planet and its ability to sustain human life and civilization since Al Gore published his first book on the climate than in all the centuries – all the millenniums – that came before.”
Our framing of the problem is that climate change represents a green swan – it is a new type of systemic risk that involves interacting, nonlinear, fundamentally unpredictable, environmental, social, economic and geopolitical dynamics, which are irreversibly transformed by the growing concentration of greenhouse gases in the atmosphere. Climate-related risks are not simply black swans, ie tail risk events. With the complex chain reactions between degraded ecological conditions and unpredictable social, economic and political responses, with the risk of triggering tipping points, climate change represents a colossal and potentially irreversible risk of staggering complexity.
Revisiting financial stability in the age of climate change
The reflections on the relationship between climate change and the financial system are still in their early stages: despite rare warnings on the significant risks that climate change could pose to the financial system, the subject was mostly seen as a fringe topic until a few years ago. But the situation has changed radically in recent times, as climate change’s potentially disruptive impacts on the financial system have started to become more apparent, and the role of the financial system in mitigating climate change has been recognised.
This growing awareness of the financial risks posed by climate change can be related to three main developments. First, the Paris Agreement’s Article 2.1(c) explicitly recognised the need to “mak[e] finance flows compatible with a pathway toward low greenhouse gas emissions and climate-resilient development”, thereby paving the way to a radical reorientation of capital allocation. Second, the Governor of the Bank of England, Mark Carney suggested the possibility of a systemic financial crisis caused by climate-related events. Third, in December 2017 the Central Banks and Supervisors Network for Greening the Financial System (NGFS) was created by a group of central banks and supervisors willing to contribute to the development of environment and climate risk management in the financial sector, and to mobilise mainstream finance to support the transition toward a sustainable economy.
The NGFS quickly acknowledged that “climate-related risks are a source of financial risk. It is therefore within the mandates of central banks and supervisors to ensure the financial system is resilient to these risks”. The NGFS also acknowledged that these risks are tied to complex layers of interactions between the macroeconomic, financial and climate systems (NGFS.
As this book will extensively discuss, assessing climate-related risks involves dealing with multiple forces that interact with one another, causing dynamic, nonlinear and disruptive dynamics that can affect the solvency of financial and non-financial firms, as well as households’ and sovereigns’ creditworthiness.
In the worst case scenario, central banks may have to confront a situation where they are called upon by their local constituencies to intervene as climate rescuers of last resort For example, a new financial crisis caused by green swan events severely affecting the financial health of the banking and insurance sectors could force central banks to intervene and buy a large set of carbon-intensive assets and/or assets stricken by physical impacts.
But there is a key difference between green swan and black swan events: since the accumulation of atmospheric CO2 beyond certain thresholds can lead to irreversible impacts, the biophysical causes of the crisis will be difficult, if not impossible, to undo at a later stage. Similarly, in the case of a crisis triggered by a rapid transition to a low-carbon economy, there would be little ground for central banks to rescue the holders of assets in carbon-intensive companies. While banks in financial distress in an ordinary crisis can be resolved, this will be far more difficult in the case of economies that are no longer viable because of climate change. Intervening as climate rescuers of last resort could therefore affect central bank’s credibility and crudely expose the limited substitutability between financial and natural capital.
Given the severity of these risks, the uncertainty involved and the awareness of the interventions of central banks following the 2007–08 Great Financial Crisis, the sociopolitical pressure is already mounting to make central banks (perhaps again) the “only game in town” and to substitute for other if not all government interventions, this time to fight climate change. For instance, it has been suggested that central banks could engage in “green quantitative easing”10 in order to solve the complex socioeconomic problems related to a low-carbon transition.
Relying too much on central banks would be misguided for many reasons. First, it may distort markets further and create disincentives: the instruments that central banks and supervisors have at their disposal cannot substitute for the many areas of interventions that are needed to transition to a global low-carbon economy. That includes fiscal, regulatory and standard-setting authorities in the real and financial world whose actions should reinforce each other. Second, and perhaps most importantly, it risks overburdening central banks’ existing mandates. True, mandates can evolve, but these changes and institutional arrangements are very complex issues because they require building new sociopolitical equilibria, reputation and credibility. Although central banks’ mandates have evolved from time to time, these changes have taken place along with broader sociopolitical adjustments, not to replace them.