Watch out, wave of retrenchments coming
Sadly, but not surprisingly, a vast number of small enterprises are set to fail under the relentless pressure of higher costs that can’t be passed in. The latest wage rise is just another blow. But there is an even more serious problem for the nation.
Solvent large and small enterprises around Australia are in a state a shock. Businesses where solvency is not an issue are stepping back and trying to work out what happens next because nobody really knows what the Albanese’s policies combined with the effect of state, deficits will do to the national economy.
As they see it, we are facing an unprecedented, serious socialist intervention covering the way they manage their business and hire their staff. It's a new era of business for Australia — akin to the 1950s-1970s era but without tariffs.
Yesterday, I described how BHP is waiting a couple of years before committing to massive South Australian investment. But that long term “wait and see strategy does not apply to day trading of Australian businesses. They will watch the impact of the government’s “sugar hit” led by wages rises, tax cuts, power subsidies etc to see if it's possible to pass their cost rises on in prices. By August, they will know.
In the crises of 1975 and 1989 many large companies were imperilled by too much debt. This time, the bulk of large and medium-sized ASX companies are not at debt risk. It is their employees that are at risk. And many of those employees can now sense the danger and that is impacting their previously abundant spending
The cost rises continue to hit business covering areas like the energy, rent, insurance, land tax (in some states) or government charges. Many enterprises are trying to work out an enterprise agreement, but now learn from my commentaries and other sources that the industrial relations legislation directs them away from enterprise agreements into industry agreements. That means higher costs and less productivity.
Then there are all the other nasties in the industrial relations legislation yet to impact, including higher transport costs and the total mess of casual labour. At the same time, enterprises with more than 15 employees must send their “union representatives” way from their workplace to be trained in how to share with management control of the business.
These are revolutionary socialist blows coming at a time of economic turmoil where an increasing number of business customers are suffering. The Federal government forged on with its socialist experiment via the industrial relations legislation in the full knowledge that what they were doing was undertaking unprecedented actions at the time of a Reserve Bank squeeze on the economy. Albanese was either oblivious of the dangers or did not care. He had once chance to deliver for ALP financiers, unions, and took it.
Meanwhile, the numbers under rent and mortgage stress are increasing as it spreads into what were affluent areas. In Victoria, the tax attack on holiday homes and landlords is relentless and the number of unsold holiday homes grows. The number of investment properties decline.
In this calm before the storm, companies are realising they have three choices – lower profits; increase prices to maintain margins or become more productive through retrenchment our better organisational structures. If it is to be the third choice, then the impending IR legislation means action must be swift. Telstra showed the way.
Accordingly, given there is increased nervousness now about lifting prices, the period of sitting back and waiting and see what happens will not last long. Boards will require management to act. My guess is that on August 26 when the industrial relations act comes into operation will make August the month when companies that can’t lift prices will stop sitting back and watching and will take action. There will be a wave of retrenchments of some magnitude.
Banks warn us that if unemployment gets to five per cent (it’s currently around 4.1 per cent) then we will see falling property prices and a much deeper crisis. That would leave the way open for an interest-rate cut later this year.
But as I have pointed out many times our interest rates are significantly lower than the US and other developed countries, so if we are not careful our dollar will be the subject of a market raid if we cut interest rates too far. This week, we are seeing Japan’s central bank supporting the yen because traders have been hitting the currency. Australia is a much better target.