Good News/Bad News for the Economy

In a good news / bad news day for Australia’s economy, news of increasing retail sales and an improving trade surplus with the rest of the world was tempered by bad debt rising to a 16 year high.

In seasonally adjusted terms, all of Australia’s retail industries had an increase in March 2009 – Food retailing (+0.4%), Department stores (+13.2%), Clothing and soft good retailing (+6.4%), Household good retailing (+1.3%), Other retailing (+1.5%) and Cafes, restaurants and takeaway food services (+1.4%) rose, according to the Bureau of Statistics.

The country’s trade surplus rose to $2.49 billion, the second highest on record, as exports maintained their strength and imports fell.

Yesterday, the central bank announced it was leaving Australia’s key interest rate, the cash rate, unchanged at 3.0 percent, noting:

“While the near-term outlook remains weak, there are further signs of stabilisation in several countries. The Chinese economy in particular has picked up speed in recent months and many commodity prices have firmed a little. The considerable economic policy stimulus in train in most countries should help contain the downturn and support an eventual recovery.

“Borrowing for housing is picking up, particularly among first-home buyers. Monetary policy has been eased significantly. Market and mortgage rates are at very low levels by historical standards and business loan rates are below average, reducing debt servicing burdens considerably. Much of the effect of these changes is yet to be observed.”

The country’s big banks, however, are feeling the pain of increasing bad loans on their books.

Accountancy firm PricewaterhouseCoopers reports that bad debts at Australia’s four big banks – Australia and New Zealand Banking Group, Commonwealth Bank of Australia, National Australia Bank and Westpac Banking Corporation have hit a 16 year high.

PWC complemented the banks for delivering a very creditable set of half-year earnings amidst deteriorating economic conditions, scarcity of capital and rising unemployment. PWC noted the banks’ underlying cash earnings were $8.4 billion – a six percent reduction over the previous corresponding period.

“Compared to the extraordinary losses experienced by banks across the UK, US and Europe, Australia’s majors have fared extremely well.”

The gloss was taken off the banks’ results, however, by a near-trebling of bad debt expenses to $6.5 billion – a 16 year high – up 178 percent. Over the same period total bad debt provisions doubled to $16.3 billion.

Mike Codling, PricewaterhouseCoopers Banking and Capital Markets Leader said,

“The significant rise in bad debt expenses has not been surprising. We’ve seen the collapse of some large highly-geared corporate borrowers and now we’re starting to see the broader impacts of the economic recession, with some pain coming through the small to medium size business exposures.

“Clearly the level of write offs is going to increase considerably. But given the level of balance sheet provisioning now in place, it remains an open question as to whether the level of expenses will rise again.

“Over the new few periods a key determinant will be the extent to which unemployment, and underemployment, will continue to rise.”