Economy at capacity, rate rise more likely … Wages continue to grow … Exports broke? Fix them … Franchising talks … Broadband coalition … Small caps results mixed

Economy at capacity, rate rise more likely: RBA governor

The Australian economy is at “full capacity” and an increase in interest rates is more likely than a cut, Reserve Bank Governor Glenn Stevens told a parliamentary committee in Perth on Wednesday morning.

Inflation will remain close to the Reserve Bank’s 3% limit and could become “uncomfortably high” if demand growth exceeds expectations in the near term, Stevens says.

He says businesses are facing capacity constraints on several fronts, particularly labour, where business will continue to find it “harder and more costly to find appropriate staff” in the coming months.

Further high levels of business investment, especially in the resources sector, and expansion in the construction sector and steady growth in household consumption are the other domestic factors driving economic expansion.

A US economy that continues to defy gloomy expectations, and the strong likelihood that the Chinese economy will continue to grow rapidly, will be external drivers of domestic growth, Stevens says.

Stevens also chose to weigh-in on the debate about whether the big, debt-driven deals by private equity firms are likely to come unstuck, commenting that while past low levels of corporate leveraging meant there was some room for more debt, the trend to increased debt “will bear watching.”

Glenn Stevens speech to the House of Representatives Economic Committee is available here.

Wages continue to grow

Wages grew at 1.1% seasonally adjusted in the December quarter of 2006, up from 0.8% in the previous quarter, according to Australian Bureau of Statistics figures released on Wednesday.

The strong wage growth figure confirms recent surveys in which many businesses reported that they were facing significant pressure to increase pay in order to keep and attract staff.

Vacancies for skilled workers have increased by 0.5% in February 2007, up 6.1% on the corresponding period in 2006, according to the Department of Employment and Workplace Relations’ latest Skilled Vacancies Index.

The ABS 1.1% figure means wages grew at 4% in 2006, well above the rate of economic growth of 2.5%.

Wages increased the most in the mining (6.5%), electricity, gas and water (6.0%) and construction (5.1%) sectors, while hospitality (2.0%) and retail (2.4%) experienced the slowest pay growth.

Western Australian and Queensland experienced the strongest levels of growth. See Big Issues feature on how to beat wages pressure.

If Australia’s export scheme is broke, fix it

Australia’s main export assistance scheme continues to attract criticism after revelations that yet again the program would probably not spend all of its allocated budget in 2006-07.

It is expected that of the $60 million allocated for the Export Market Development Grant Scheme for the 2006-07 year, about $8 million will be returned to consolidated revenue instead of assisting companies to market their exports overseas.

The Export Market Development Grants Scheme, which was redesigned several years ago to encourage smaller companies to export, has complex guidelines that turn companies away from complying.

The redesign also locked many medium-sized companies out of the scheme leading critics to point out that medium-sized companies with a successful track record in Australia are more likely to be successful exporters.

Meanwhile rumours from Canberra suggest that there could be changes announced to a number of programs before the election later this year. Word is that everything is under review — the Export Market scheme included — and there will be a policy statement made by industry minister Ian Macfarlane in the not too distant future.

More consultation on franchising

Changes to the mandatory Franchising Code are likely to be presented to Parliament by June 2007.

The Federal Government is now seeking the views of the franchising industry on how to best implement its response to the review of the disclosure provisions of the mandatory Franchising Code of Conduct led by KPMG’s Graeme Matthews.

The Government accepted all but three of the Franchising Review Committee’s 43 recommendations, including the requirements that:

• Franchisors disclose rebates and other financial benefits it receives from suppliers.
• Franchisors provide annual audited accounts of the marketing fund to franchisees.
• Franchisors provide names and contact details of failed franchisees to prospective franchisees – within privacy laws.
• Franchisors tell franchisees about material changes within 14 days, rather than 30 days previously.
• International franchisors selling master franchises in Australia comply with the disclosure requirements of the code.

Telcos to announce broadband network investment

The coalition of telcos formed with the intention of creating non-Telstra broadband infrastructure will announce details of its plans today, The Australian reports.

Telcos including Optus, Powertel, Primus and Macquarie Telecom announced that they would join forces to put fibre to the node (FTTN) infrastructure in place in July last year. Wednesday’s announcement is expected to provide firm details of the plan.

IT News

The call for the scrapping digital rights management software – which protects songs and videos online – is building. Apple boss Steve Jobs has come out against it, recent studies show many record industry types are against it, and now Australia’s largest independent online music seller Destra has declared his opposition to it. “CRM is just too confusing,” Destra CEO Domenic Carosa, told The Australian Financial Review.

Small cap results – the good and the bad

Franchised travel agency Jetset Travelworld reported a 5.3 % increase in sales, but a 48.4% increase in net profit to $4.6 million for the first half of 2006-07. The company said a significant growth in international travel and improved yields fuelled the result.

But other small caps reporting on Tuesday were less optimistic.

Rebel Sport sales increased 14.5% to $210.5 million for the first half of 2006-07, compared to first half of 2005-06. Net profit was up 11.6%. But the sporting goods retailer said sales growth is thanks to discounting to clear inventory, and margin pressure will continue for the rest of 2006-07.

Paint company Wattyl reported a disappointing result for the first half. The company blamed subdued sales – which fell 1.2% to $211.5 million – on a subdued housing market in Australia and New Zealand. Wattyl doesn’t expect conditions to improve this financial year.

Economic roundup

New motor vehicle sales in January 2007 were up 5.3% seasonally adjusted from December 2006, Australian Bureau of Statistics figures released on Wednesday show. Sales increased in all states, with South Australia leading the way (10.5%) and, surprisingly, Western Australia (1.1%) the slowest.

The stock exchange has continued hovering just below the 6000 mark today, sitting on 5964.5 at 12:30pm Wednesday, while the Australian dollar is worth US78.73 cents.