Victoria. Great one day, on the slide the next

KEY economic indicators are showing an alarming slide in Victoria's economic activity and weakness throughout the nation's south-east, intensifying speculation of another interest rate cut next week.

Business investment in Victoria slumped 14 per cent in the March quarter from a year earlier, Bureau of Statistics figures reveal.

This wiped away more than 2 per cent of the state's output, as investment sank to 2008 levels.

The high dollar and high interest rates have flattened Victoria's economy, along with most of the south-east and even parts of Queensland and Western Australia remote from mining.

In the six months to March, investment boomed at an annualised rate of 40 per cent in mining, but slumped 10 per cent in service industries and 18 per cent in manufacturing.

A sense of crisis is growing in the global economy. China's index of manufacturing activity slumped 5.5 per cent in May. India reported that its gross domestic product grew by only 5.3 per cent in the year to March, its slowest growth for nine years.

China and India have generated most of the world's growth since 2008, including Australia's export boom. As their demand falls, Australia's trade has sunk into deficit. Commodity prices have slumped 10 per cent, falling 1.8 per cent in May alone.

Futures markets now see interest rates going into free-fall for the rest of the year. They have priced in the equivalent of six more interest rate cuts by December, the first coming when the Reserve Bank board meets on Tuesday.

Economists are divided. The ANZ Bank said the non-mining economy was underperforming and inflation presented no threat. But Merrill Lynch chief economist Saul Eslake said a rate cut now could be wasted, with the federal government handing out $2.4 billion to households through the Schoolkids Bonus and compensation for the carbon tax.

Europe, meanwhile, is sliding deeper into crisis, with no sign of agreement on how to reverse it. Spain's central bank revealed that nervous depositors took ?97 billion ($A124 billion) out of Spanish banks in the March quarter, even before the turbulence of May.

The bureau's figures show Victoria has been flattened by the high dollar and high interest rates.

This week's data shows that:

. Home building approvals slumped 23 per cent in the year to April. Housing, one of the state's great strengths during the global financial crisis, is now in reverse.

. Total construction activity slumped 5 per cent in the March quarter, with building activity shrinking faster than engineering work grew.

? Retail turnover is now flat as shops rely on discounts to attract sales. In the past year, retail sales have simply kept pace with inflation.

. Unemployment on the smoothed trend figures has risen from 4.8 per cent to 5.5 per cent of the workforce, the highest rate outside Tasmania.

Yesterday home prices were added to the list. The RPData-Rismark index reported that Melbourne prices tumbled 2.7 per cent in May alone, and by 8.4 per cent in the past year, to a median price of $490,000.

Westpac economists said the slide in prices was even steeper after seasonal adjustment. In the six months to May, they estimate, house prices fell at annualised rate of 16 per cent, and units and apartments at over 10 per cent.

Westpac senior economist Matthew Hassan said falling prices and rising auction clearance rates suggested part of the slide in May was due to sellers lowering their prices to ''meet the market''.

Manufacturing is also in trouble. The Australian Industry Group's manufacturing index slumped 1.5 points in May to 42.4, its second lowest since 2009. The only growth was in wages, input costs and unsold stockpiles.

Read more >>

Running on empty: PM under fire

RETAILERS have rounded on the Gillard government over the carbon tax, saying the debate surrounding it is partly to blame for a slump in consumer spending that yesterday sparked a $1 billion rout of retail companies on the sharemarket.

A day after department store giant David Jones revealed a dramatic reversal in its sales and profit outlook, its chief executive took aim at the Prime Minister and her carbon tax, saying it had contributed to shoppers curbing their spending.

The Australian National Retail Association also warned that the debate over the carbon tax was adding to the worries of consumers after a year when interest rates and energy prices had been on the rise.

An already fragile sharemarket was rattled by the warning from David Jones boss Paul Zahra that his stores were experiencing the worst trading conditions in more than 20 years.

The warning sent the David Jones share price plummeting almost 20 per cent and produced a knock-on effect across the retail sector, with Myer and shopping centre owner Westfield among those sold off.

While Mr Zahra emphasised that rises in interest rates and the cost of living were spooking shoppers, he said the retail outlook was made worse by political uncertainty and the threat of new taxes, which were particularly costly for DJs' core higher-income customers. "There is such a level of uncertainty with a minority government . . . people just don't know what else is about to hit them," he said.

He cited the flood levy and the carbon tax debate as ways in which Ms Gillard's government had hurt confidence. "So the reality is she has hit our customers directly," Mr Zahra said. "That aspirational customer has actually stopped shopping and people are just not confident about the year ahead.

After the carbon tax policy was released on Sunday, Myer boss Bernie Brookes said it would add $3 million to $6 million to costs, and these would be passed on to consumers.

But Australian National Retail Association chief Margy Osmond said confidence had already been hit by rates and living costs before this week. "When you add to that things like the Queensland flood levy, the carbon price and the prospect there might be more interest rate increases . . . it's combined to make a serious loss of confidence," she said.

Russell Zimmerman, of the Australian Retailers Association, said talk about the carbon tax from both sides of politics was biting. "There is a lot of talk about it out there and people get concerned by the fact they are uncertain about how it is going to affect them."

But Opposition Leader Tony Abbott disputed the claim by Treasurer Wayne Swan that his talking down of the economy had hit confidence. "I want to restore confidence by stopping the carbon tax," Mr Abbott said.

Access Economics director Chris Richardson said retailers were facing "an absolutely howling headwind" because households were now saving their money after two decades of spending freely. "DJs are the canary in the mine warning of a decline in discretionary spending," he said. "But there's a number of causes, not just the carbon tax. The talk of possible interest rate rises, the crisis in Greece, and the soft patch here in Australia: worrying signals are clearly flashing."

Financial markets are now punting on a rate cut in coming months, and possibly two.

The Bureau of Statistics says household saving jumped sharply during the global financial crisis, fell briefly, but is now back at crisis levels. In the March quarter, households saved 11.5 per cent of their disposable income, up from 0.7 per cent in the six years to 2007.

Household savings are now almost as high as in the mid-1980s, before Australians began taking on serious debt.

The downturn has led to a number of collapses in the retail sector including booksellers Borders and Angus & Robertson and fashion chain Colorado. And last night, the former Direct Factory Outlet in Melbourne's Southern Cross station was placed in receivership.

Meanwhile, sharply weaker conditions in the real estate market are predicted to push Victoria's home prices lower in the next year, the National Australia Bank said in its quarterly assessment of the market.

The NAB residential property index tipped home prices would sink 2.1 per cent in the 12 months from June.



RETAIL SHARE PRICES IN FREEFALL

HARVEY NORMAN $2.30

DOWN 4.6%

JB HI-FI $15.65

DOWN 5.32%

MYER $2.48

DOWN 6.4%

DAVID JONES $3.20

DOWN 18.2%

Read more >>

Australians taking strong dollar out of the country

THE high dollar is driving Australians out of the country. In April, there was a stunning 20 per cent jump in the number heading overseas, with almost 700,000 flying out.

In breathtaking evidence of how the high dollar is shifting Australians' spending overseas, the Bureau of Statistics reports that three Australians went overseas in April for every two overseas visitors coming here.

Unreported bureau figures this week suggest that even before the April surge, more than a fifth of the growth in consumer spending in the March quarter was spent overseas by Australian tourists.

While the national accounts showed household spending up 3.4 per cent in the year to March, the detailed figures suggest the growth in household spending within Australia was only 2.8 per cent.

In the March quarter, consumer spending locally grew only 0.46 per cent. Yet in a year, net consumer spending overseas almost doubled, rising in real terms from $1.05 billion to $2 billion.

These figures exclude online purchasing from overseas websites, so actual growth in local spending was even lower.

The shift of consumer spending overseas is accelerating. Visitor arrivals in Australia grew only 3 per cent in April, and were down 3 per cent in the April quarter.

But Australians are making the most of the strong exchange rate, taking their dollars overseas, and spending them when they buy more.

A record 78,000 Australians spent April in Indonesia, which is challenging New Zealand (93,000) as our top overseas destination.

But there were also record departures for the United States (71,000), Thailand (46,000), China (33,000), Fiji (29,000) and almost everywhere else - except Australia.

The high dollar discourages foreigners, since their currency buys less in Australian stores, hotels and restaurants. In April, only 462,000 tourists came here but more than 690,000 Australians travelled overseas.

Year on year, tourist arrivals rose by by only 19,000, whereas Australian tourist departures rose by 137,000. The growth in arrivals is mostly from Asia, where soaring airfares have diverted tourists from America or Europe to nearby Australia.

Tourism and Transport Forum chief executive John Lee expressed alarm at the trend and urged the government to give tourist operators transitional help with the carbon tax.

''If international aviation is exempt, but the tax applies to domestic travel, that will encourage more people to head overseas, as travelling locally will be relatively more expensive,'' Mr Lee said.

The strong dollar had already meant that fewer Australians were taking their holidays in Australia, he said.

Read more >>