Signs that interest rate rises are hitting jobs ::

Author: Stephen Long
Date: 12/06/2008
Publication: ABC News PM

MARK COLVIN: So far interest rate rises have been hitting the hip pocket; now there are signs they're hitting jobs.

Official estimates say that after 18 months of employment growth, the Australian economy shed nearly 20,000 jobs in May.

The fall in employment comes as the credit crunch hits home, wiping billions off the stock market, and endangering financial companies saddled with debt.

Economics correspondent Stephen Long reports.

STEPHEN LONG: Is this the turning point? That's the question begged by the labour force figures for May, which showed the first fall in employment for more than a year and a half.

A decline of nearly 20,000 jobs, plus a fall in the participation rate, suggesting that people may have given up the hunt for work.

JOSH WILLIAMSON: Well this is certainly a surprise result today and for us suggests there could be a start of a turnaround in the labour market.

STEPHEN LONG: Economist Josh Williamson from TD Securities.

JOSH WILLIAMSON: Normally we expected to see a bit more resilience in the labour market in May and not to get a turn for a couple of months now so this may suggest that the Reserve Bank could be getting a little more traction from its interest rate rises than either they or the market had expected.

STEPHEN LONG: It may or it may not. The labour force numbers are notoriously volatile, and you can't read too much into one month's figures - especially as one State accounted for most of the job-shedding.

JOSH WILLIAMSON: We're not going to get a definitive answer, probably for another couple of months because most of the weakness today was concentrated in New South Wales and particularly female part-time employment so it seems to be a very New South Wales eccentric result. In the resource states there was hardly a move on the employment market.

What we'd be looking for to sort of validate where this is a turning point is whether we actually see weakness in some of the other non-resource intensive states in their employment data going forward as the economic slowdown starts to bite.

STEPHEN LONG: The mining boom is one reason why the Reserve Bank won't be relaxed and comfortable just yet, despite the fall in jobs in May.

Bill Evans, the chief economist at Westpac.

BILL EVANS: I don't think we're going to see a long series of bad employment numbers yet. But what it's saying to the Reserve Bank is that the tight monetary policy is working and it's sending them the signal that they should be waiting for some time to see whether this weakness is sustained because there's going to be a number of positives heading the economy in the second half of this year, not the least of which will be the tax cuts and not the least of which will be further surges in coal and iron ore prices.

STEPHEN LONG: Central bank officials fear the big export prices Australia's minerals are commanding will undermine their efforts to curb demand and cut inflation.

But as the miners gain, financial companies are feeling the pain.

Babcock and Brown, Australia's second biggest investment bank is the latest to be hit.

SEAN FENTON: Babcock and Brown in particular has lost the confidence in the market.

Sean Fenton from Tribeca Investment Partners, which holds shares in the Babcock spin-off Babcock and Brown Power and maybe wishes it didn't.

SEAN FENTON: A lot of its listed vehicles had problems with excessive debt and refinancing that and that's unnerved investor confidence to an extent.

STEPHEN LONG: That's putting it mildly. Babcock & Brown shares fell more than 25 per cent today and its market value is getting perilously close to the level that, if it was sustained, could see its bankers review its ability to repay debt.

SEAN FENTON: Banks have the option to review it when the market cap falls below $2.5-billion which it's getting close to now and there's talk that hedge funds are trying to sell the stock down there to trigger that. That's certainly scaring people away from buying it and big institutional investors just aren't prepared to take the risk of stepping up there and try to catch a falling knife.

STEPHEN LONG: Babcock's blaming short sellers who've targeted the company stock, but it's a target because of its business model. Like Allco and Centro, Babcock borrowed big time when debt was cheap and asset values were rising. Now the credit cycles turned, its leverage is a liability.

ROGER MONTGOMERY: All of the financial services firms that use leverage in some form to purchase assets are going through this. Babcock are currently is the flavour of the month for those who want to be negative. My view is that the business will survive in some form.

Now that can't be said for a lot the smaller players.

STEPHEN LONG: Roger Montgomery from the fund manager Clime Capital. Mr Montgomery was either smart, or lucky. he put half of Clime's assets into cash well before the credit crunch hit.

Right now he sees a few bargains for investors, and a whole lot of risk.

ROGER MONTGOMERY: I think there's a very real risk that we have what people in my industry refer to as a two track economy so on the one hand you've got booming resources and on the other hand you've got slowing residential construction slowing retail spending. All those sorts of things.

So you may end up with a situation where commodity prices keep going up and you have the broader economy or the non-resources economy slowing down. And if it slowed down enough you would have a recession and prices going up you've got inflation and recession which equals stagflation. Not a pretty picture for asset prices generally.

MARK COLVIN: Roger Montgomery from Clime Capital ending Stephen Long's report.

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