ECONOMY

As a result of Chinese demand holding strong in the short run, the Australian economy is expected to recover despite of the poor data since early November and a third-quarter GDP contraction. More substantial risks can be expected later in 2017, if US inflation rises sharply.

There have been fresh concerns surrounding the overall economic outlook and the possibility of a recession due to the bad run of Australian data over the past few weeks.

In the final week of November, Australia reported a 4.9% decline in construction work done for the quarter and an 8.5% decline in new-home sales while building approvals fell 12.6% for October following a revised 9.3% slide the previous month. Private capital expenditure declined 4.0% in the third quarter after a revised 5.2% decline the previous quarter.

The data culminated in a report calculated a GDP decline of 0.50% for the third quarter compared with an expected increase of 0.2% for the quarter. This was the first contraction for five years and the steepest decline in since 2008. The only significant positive release came from an increase in the PMI manufacturing index, although the services PMI index also registered a small gain for November.

The dismal run continued with the trade deficit widening to AUD 1.54 bn for October from AUD 1.27 bn the previous month and more than double the expected deficit. Australia has not suffered a technical recession of two consecutive quarters for 25 years, but the third-quarter GDP release and run of notably poor data will undermine confidence.

Consumer confidence has held firm as a consequence of the interest rates at record lows at 1.50%, which promises a boost in the domestic spending. The level of interest rates in real terms makes it very unlikely that there will be a decline in consumer spending. There was a decline in government investment for the third quarter, but there will be a recovery for the fourth quarter.

Commodity prices have maintained a strong tone with an increase in Australian commodity prices in SDR terms of over 30% in the year to October. Higher commodity prices will provide important net support to the Australian economy.

The Federal Reserve will increase interest rates at the December policy meeting with an increase in short-term rates to a 0.50-0.75% range. Higher US rates will have some negative impact on US demand and will also tend to restrict global growth. A small increase in interest rates will, however, not have a major impact and the Federal Reserve will remain committed to an expansionary monetary policy.

The biggest threat to the Australian outlook will come from a squeeze on dollar liquidity and deterioration in financial conditions. These risks should not be under-estimated, although the Fed’s reluctance to tighten aggressively should provide underlying and crucial support to financial conditions. Increase in US inflation is the biggest threat to the Australian economy in the next few months. This can risk a serious US and global downturn, especially if the Chinese property sector deteriorates sharply and non-performing loans intensify.

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CBA, the nation’s biggest lender with $266bn worth of mort­gages to owner-occupiers and $135bn to investors, in line with moves by rivals lifted variable investment home loan rates by seven basis points to 5.56 per cent, further expanding the difference between the 5.22 per cent paid by owner-occupiers.

Commonwealth Bank raised prices on $135 billion worth of mortgages resulting higher interest rates for most property investors after boosting profits while putting borrowers under greater stress as the cost of servicing record household debt levels starts to rise.

However, CBA’s decision not to lift rates for customers who live in their home was notable after smaller rivals Bendigo and Adelaide Bank and ING Direct did so in a move that analysts said revealed greater stress on smaller lenders.

CBA’s move came after the annual house price growth fell to 3.5 per cent while softening business conditions sparked warnings from economists that consumers were in line for further pain. Among CBA’s other changes, rates for the bank’s line of credit loans, which allow customers to access equity in their home, will rise 15 basis points to 5.78 per cent. Customers on “interest-only” home loans would be placed into new products from March, with pricing still being ­assessed.

Matt Comyn, CBA’s retail banking boss, said a range of factors led to the rate rise, including higher funding costs, having to use more equity to write home loans and the regulator’s 10 per cent ­annual growth cap on investor lending.

“These changes balance the needs of our borrowers and shareholders, while helping to underpin the long-term sustainability of the Australian home loan market,” Mr Comyn said. He said that while investor lending had recently picked up, growth remained well below the peaks of mid-last year and would probably slow.

ANZ, the third-largest home loan lender with $81bn in loans to landlords, followed by lifting investor rates eight basis points to 5.6 per cent, while Suncorp increased rates by 15 basis points to 5.87 per cent. Bendigo and Adelaide Bank and ING stepped up the repricing, lifting rates for owner-occupiers and investors by 10 basis points and 15 basis points, respectively, despite the ­Reserve Bank last week keeping the cash rate at a record low 1.5 per cent.

More expensive housing debt comes after last week’s third-quarter GDP data revealed a 0.5 per cent contraction, the first since 2011 and biggest since the global financial crisis.

Also, data released this week by the Bank for International Settlements indicated that Australia had one of the highest house debt service ratio in the developed world, below only The Netherlands and Denmark.

The Australian Bureau of Statistics said property prices rose only 1.5 per cent in the third quarter, moderating annual growth to 3.5 per cent, the slowest since early 2013 and far weaker than other indicators.

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The new tax arrangements for working holiday makers will ensure that the Australian agriculture, horticulture, tourism, and hospitality sectors, as well as other industries in regional areas, can have a competitive tax rate that does not compromise other important visa classes such as those under the Seasonal Workers Program.

The Australian Government last week reached an agreement with the Green Party to lower the proposed tax rate for working holiday makers from 19 percent to 15 percent. Legislation to implement the rate was passed by the Senate on December 1, by 43 votes to 19.

Treasurer Scott Morrison explained that the tax rate for 417 and 462 visa holders will now be set at 15 percent from January 1, 2017, consistent with the rate applicable to visa holders under the Seasonal Workers Program. The 417 visa is available to those aged over 18 and under 31 who wish to holiday and work in Australia for up to a year. The 462 visa is applicable for individuals holding passports from certain countries, including Argentina, China, and the US.

In addition, the Departing Australia Superannuation Payment rate for 417 and 462 visa holders will be set at 65 percent, rather than the 95 percent the Government had previously proposed.

Morrison said that these measures will contribute AUD560 m (USD415.5m) net to the Budget, “almost 74 percent of the revenue the original Budget measure would have raised over the current forward estimates [period].” The Government had originally intended to tax backpackers at 32.5 percent from July 2016.

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There had been growing concerns around the economy as trade data as well as business and consumer confidence readings had been lacklustre following the nation’s first quarterly economic contraction in over five years. However, Australia-wide spending accelerated to its fastest clip in over seven years in November, a rare positive piece of data on the back of a series of disappointing economic updates.

The Christmas period is upon us and there are signs that retail spending has lifted in the last few weeks, which is a positive sign for Australian businesses leading into the New Year.

The Commonwealth Bank Business Sales Indicator, which tracks debit and credit card transactions, revealed a 1.2 per cent jump in November on the heels of an upwardly revised 1.1 per cent lift in October.

The November reading represented the best monthly showing since early 2009 and extended a positive run through which sales have gained an average of 0.9 per cent over the past four months.

This followed a slow start to 2016 as average sales growth was a meek 0.2 per cent for the first six months.

“Growth in spending is a great sign that the recent slide in GDP figures is going to be a minor blip on the radar,” CommSec senior economist Savanth Sebastian said.

“The Australian economy is in good shape, consumers are confident, and the outlook for 2017 remains bright. It’s unlikely that we will be heading for a second GDP dip and a technical recession.”

The growth in spending has been broad-based with 16 of the 19 industries measured recording growth. The exceptions included transportation, mail order and telephone order providers.

Leading the way was government services with a spending jump of 4.5 per cent, ahead of amusement and entertainment 3.6 per cent rise.

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The Australian Bureau of Statistics (ABS) released its latest lending finance data for October, reporting a 1.7% month-on-month increase in total commercial finance commitments.

The value of Australian commercial finance commitments rose in October, as did revolving credit. After 9 consecutive months of fall, September’s results were the first positive figures of 2016.

Revolving credit commitments also jumped up in October, 0.4% higher month-on-month. Revolving loan facilities allow businesses to borrow money as needed to fund working capital needs and maintain operations. Drawing against the loan brings down the available balance, whereas making payments on the debt brings up the available balance.

Fixed lending commitments in October were also slightly higher, up 2% month-on-month.

The value of housing finance for owner occupation fell (0.5%) in October, as did personal finance (-1.2%), while lease finance rose slightly (0.1%).

In its latest Financial Stability Review, the Reserve Bank of Australia (RBA) declares growth in domestic loan books has slowed over the past six months, reflecting a tightening of standards in some areas.

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INTERNATIONAL BUSINESS

While inefficiencies in resource allocation and deficiencies in innovation are likely to hamper realisation of the “Made in China 2025” plan, a deep pool of available funding and powerful political backing are set to elevate a clutch of Chinese manufacturers to the world’s top echelon, according to a report by The Mercator Institute for China Studies (Merics).

South Korea, Germany and Japan are among the countries most at risk from an upsurge in Chinese manufacturing competitiveness that is likely to flow from Beijing’s top-level strategy to become a high-tech power by 2025, according to a latest report.

“Even if Made in China 2025 will not fully accomplish its objective of achieving the widespread application of smart manufacturing in the next decade, the plan will develop an enormous impact that will be felt not only in China but throughout the global economy, Industrial countries should have no illusions: Made in China 2025 will elevate a small but powerful group of Chinese manufacturers, dramatically increasing their competitiveness,” said the report.

The strategy effects Czech Republic, Germany, Italy, Hungary, Japan and South Korea the most as each of them derives more than 40 per cent of the value of their industrial output from the high-tech and medium-tech industries that are targeted in China’s plan.

Industrial policy in China often entails measures to discriminate against foreign enterprises,” the Merics report said. “For instance, the national and local governments restrict access to public procurement and limit the possibility of inward-directed foreign-direct investment, however, such measures are not prevalent in the areas of “smart” manufacturing, including robotics, industrial software, sensors and others, because most Chinese companies are currently too backward to benefit. But this could change as domestic companies climb the technology ladder and move into direct competition with foreign corporations in China.

Such an intent, the report says, can be seen in a semi-official document called Made in China 2025 Key Area Technology Roadmap, for Constructing a Manufacturing Superpower.

The semi-official document shows aggressive targets for market share in selected industries as well as the range of industries targeted.

Indications of strong state support are reinforced by funding being made available to spur Chinese innovation in smart manufacturing. The Advanced Manufacturing Fund, established this year, was approved by the State Council (cabinet) and is charged with spending its Rmb20bn ($US3bn) allocation on upgrading the technology of important industries.

The confluence of funding for innovation, official support and access to overseas acquisitions is set to galvanise an already active patent application process among Chinese companies.

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To lift the participation rate to the Kiwi level and encourage older workers to remain in the workforce beyond the age of 65, it is important to decrease effective marginal tax rates on older workers who rely on the pension according to the policymakers and economists. The current system imposes a high tax on the income of pensioners or part-pensioners, and that potentially discourages them to work while receiving the pension.

The means testing of Australia’s pension system means that a single person who earns over $4264 a year will lose their pension benefits at the rate of 50 cents per dollar. About 70 per cent of retiring Australians are affected by age pension means testing.

The structural incentives in the pension system to withdraw from the workforce in Australia are substantial and it is likely that this affects the mindset of would-be retirees however Australia did not need to go as far as adopting a New Zealand-style universal pension system in order to improve labour force participation. Alternatives could include a means test that is more generous towards older income earners and reducing the tax-free threshold on pensioners and part-pensioners.

According to OECD data New Zealand has a participation rate of 70 per cent, compared to 65 per cent in Australia. New Zealand also has a much higher participation rate among older workers. 47 per cent of men aged 65 to 69 in New Zealand are in the job market, compared to 33 per cent in Australia. Among women, the labour participation rate in New Zealand is 34 per cent, compared to 20 per cent in Australia.

In New Zealand, pensions are not means-tested and taxed from the first dollar, which means older workers will not lose out by remaining in the workforce however that cannot be sustainable with the increasing retiring population.

While Australia’s participation rate remains lower than New Zealand’s, Australia’s participation rate among older workers has increased over the years.

CBA research shows the participation rate among 55 to 64 year olds has increased by 20 percentage points to 65 per cent. The participation rate among over 65 year olds has gone up by 6 percentage points to 12.5 per cent.

The growth of part-time jobs and flexible work and the transition from labour intensive sectors such as mining and manufacturing to services sector jobs has encouraged older workers to keep participating in the workforce.

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The Australian government has announced a taskforce to “crack down on the black economy”, with a panel reportedly to consider measures such as removing the $100 note from circulation and limiting cash transactions above a certain limit.

The black economy is also variously known as the underground economy, the non-observed economy or the shadow economy, and definitions can vary to include different activities. It can include things such as undeclared cash-in-hand employment, cash payments for goods and services, and payment for illegal activities.

recent estimate by the Australian Bureau of Statistics (ABS) in 2013, encompassed proceeds from illegal activities as well as other areas, estimated the size at only 2.1% of GDP.

One of the measures to be examined will be the potential phasing out of the $100 bill, taking a cue from India, Australia may soon say goodbye to its $100 banknote. The country is mulling the abolition of its highest denomination currency, as the government may soon crack down on its tax evaders and the black economy at large.

At present, there are 300 million $100 bills in circulation in Australia. 92 percent of the country’s currency is in $50 and $100 bills. However, since many of the country’s cash payments are untaxed, estimates suggest that Australia’s black economy accounts for almost 1.5 percent of the country’s GDP. UBS, the Swiss global financial services company, had earlier advocated for scrapping banknotes of the highest denomination in Australia. “Removing large denomination notes in Australia would be good for the economy and good for the banks,” This would also help increase household deposits and reduce crime and welfare fraud in Australia, UBS analysts said.

India had scrapped its Rs 500 and Rs 1,000 banknotes early last month. This week, Venezuela too had scrapped its 100-bolivar currency leading to great chaos across the country.

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SUPERANNUATION

The Parliament has recently passed legislation that has reduced the money retail investors can transfer into the superannuation environment and still enjoy tax benefits. When the new legislation come into effect in 2017, it will have implications for SMSF investors who need to be aware to ensure that their funds remain compliant.

Introduction of the pension transfer balance cap is one of the new measures which limits amounts in tax-free retirement income stream accounts to an aggregate account balance of $1.6 million after 1 July 2017. However, it’s important to remember the limit applies per person. “So it’s possible for up to $3.2 million to be transferred to a pension account by a couple.”

The concessional contribution cap has been reduced to $25,000 per year for all eligible contributors on top of the changes to the pension transfer balance cap. Also, the annual non-concessional contribution cap has been lowered to $100,000, or $300,000 under the three-year provisions brought forward. As a result of the new rules, there’s going to be a greater need to put money into super regularly.

“Start thinking about when are you planning to put money into super. If the proceeds from a potential sale of a large asset are intended to go into super, think about doing it this financial year so the existing $180,000 non-concessional cap can be used. The idea is to take advantage of the bring forward provisions that allow you to contribute up to $540,000 into a super fund now, rather than be affected by the lower $300,000 amount that will come in next year” according to a financial consultant.

Additionally, says Pete Pennicott, a director and financial adviser with financial advice firm Pekada, one change that has not received as much attention is transitional CGT rollover relief regulations. “This means super funds will be able to reset the cost base of assets prior to 1 July 2017 and avoid potential capital gains tax consequences,” says Pennicott.

“This relief is available for super fund assets that have been transferred from pension phase to accumulation phase to comply with the transfer balance cap or new transition to retirement income stream arrangements,” he explains. This reset means the fund’s underlying assets can remain as they are currently, regardless of the existing size of the capital gain, providing the cost bases are reset prior to 1 July 2017.

“The reset ensures that people who are affected by the changes can achieve the same starting point for CGT purposes, any asset sales resulting in capital gains in the future would then be calculated from the reset cost base,” he adds.

The transitional provisions avoid the need to sell and repurchase assets, to ensure the fund has a clean slate in terms of its cost base before funds are transitioned from a tax-free environment in pension phase into accumulation where capital gains tax applies.

As such it may be worth SMSF trustees working with a financial adviser and an accountant now to work through how the recent changes to the superannuation environment may affect their fund. Running an SMSF is complex especially in light of the ever-changing superannuation rules. As a result, it’s important for trustees to stay on top of evolving superannuation rules to ensure their funds remain complaint now and into the future.

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With an increase in the consumer price index, the Age Pension income test and the Age Pension assets test are adjusted three times a year in line, although the Age Pension assets test thresholds had an additional one-off adjustment taking effect from 1 January 2017.

The Age Pension Assets will become much stricter for Australians claiming the PART Age Pension, which means hundreds of thousands of Australians will lose some, or all, Age Pension entitlements.

Effective since 20 September 2016, the income and assets tests were adjusted which means eligible Australians can own more assets and earn more income and still be eligible for a PART Age Pension. Also, those Australians who may have just missed out on the Age Pension due to failing the income test, or assets test, may now be entitled to some Age Pension. Again, note that the Age Pension assets test becomes stricter from 1 January 2017.

The investment markets have been volatile in recent times, which means the portfolios of retirees may have changed in value over the past few months (especially with the recent extreme volatility on the Australian and international share markets). Volatile markets may also mean that previously ineligible Australians may now meet the income and assets tests, or that the level of entitlements for eligible Australians has changed.

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The corporate regulator has extended the deadlines for a series of reporting requirements relating to superannuation, including the need for retirement calculators to allow for inflation, and the requirement for fund trustees to provide the same reporting figures to both the Australian Prudential Regulation Authority (APRA) and consumers.

ASIC recently introduced a requirement for all financial calculators that estimate a future return or payment to adjust these returns using an assumed rate of inflation of 2.5 per cent.

The original deadline for this requirement was 1 April 2017, but the regulator has granted an extension to providers of super and retirement calculators until 1 July 2018.

It said the exemption had been granted to super and retirement calculator providers because of the number of reforms to super that were coming in around the same time, which could affect the way estimated returns were calculated in the future. At the same time, ASIC deferred the operation of section 29QC of the Superannuation Industry (Supervision) Act 1993, which obligated fund trustees who were providing reporting to both APRA and consumers to ensure the information they provided was the same in both circumstances.

The regulator said the deferral, which now gave super fund trustees until 1 January 2019 to comply with the requirements, was prompted by the additional regulations around super product dashboard displays that were still being finalised and which would have an impact on how customers could compare super products.

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COMPANY NEWS

New Jersey-based Cognizant, said its purchase of Sydney-based Adaptra will strengthen its insurance, business transformation and platform capabilities.

IT services provider Cognizant has entered into an agreement to buy a 100-person Australian consultancy specialising in the insurance vertical, Adaptra. Adaptra implements platforms such as Guidewire to help insurance companies drive improvements across areas such as underwriting, policy administration, claims management and billing.

Insurers around the world are looking to simplify critical processes relating to policies, claims and billing,” Jayajyoti Sengupta, Cognizant’s head of Asia-Pacific, said in a statement. “Adaptra’s high-end business transformation and Guidewire expertise will further enhance our integrated solutions spanning the insurance life cycle.”

Adaptra works with five of the top 10 insurers in Australia and New Zealand, providing them with platform advisory and implementation services and helping them define their target business and operating models. Terms of the acquisition weren’t disclosed, and Cognizant did not immediately respond to a request for additional comment.

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Cisco, one of the California-based networking giant confirmed that it will discontinue its Cisco Intercloud Services (CIS) public cloud in March 2017. Cisco once had great ambitions of competing in the public cloud market against Amazon Web Services (AWS), is officially throwing in the towel on its Intercloud strategy.

The cloud market has shifted considerably in the last two years, and many of our customers are asking Cisco to help them develop cloud strategies that will help drive their digital transformations. We do not expect any material customer issues as a result of this transition.

Cisco launched its Intercloud strategy in March 2014, revealing it would invest US$1 billion into in next two years to build its expanded cloud business. Cisco was aiming to become a public cloud behemoth that would drive higher value and margins for partners. At the time Cisco’s Intercloud’s leader Nick Earle said partners were clamouring for Cisco to get into the public cloud market as an AWS alternative.

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Yahoo confirmed that it uncovered a large-scale security breach that impacted 1 billion user accounts in the largest known hack to date. Telecom giant Verizon could be considering calling off its Yahoo acquisition plans following the disclosure of a Yahoo.

This hack involved an unauthorized third party obtaining names, email addresses, telephone numbers, dates of birth and hashed passwords from some 1 billion users.

As a result, Verizon is considering a price cut or killing its planned US$4.83 billion acquisition of Yahoo completely, according to a report published by Bloomberg, citing a source familiar with the matter.

Yahoo first revealed a large-scale data breach in September when it confirmed that more than 500 million accounts were hacked in late 2014 by what the company believes to be a state-sponsored actor.

Similar to the most recent breach, the 2014 hack exposed certain user account information, such as names, email addresses, telephone numbers, birthdays, hashed passwords, and in some cases, encrypted or unencrypted security questions and answers.

Yahoo said it was made aware of this first breach over the summer. News of the first hack came one month after Verizon formally announced it would buy Yahoo in July 2016.

At the time of the disclosure, Verizon publicly said it would “evaluate as the investigation continues through the lens of overall Verizon interests,” including its consumers, customers, shareholders.

However, Yahoo shares fell 5 percent, following news of the massive breach and fears that Verizon could back out of the planned acquisition.

When reached for further comment by CRN USA, a Verizon spokesperson pointed to its public statement: “As we’ve said all along, we will evaluate the situation as Yahoo continues its investigation. We will review the impact of this new development before reaching any final conclusions.”

Despite the breach, however, Yahoo has valuable media assets, especially its sports and finance content, which is still popular today.

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FINANCIAL PLANNING

As the holiday season approaches and a new year gears ahead of us, here are financial planning tips that can help you take your 2017 financial planning to the next level and put you on the right path to a more financially secure future.

Tip # 1- Maximize Your Retirement Savings.

There are three secrets to maximizing retirement savings.

The first is to put savings on autopilot—automatic monthly withdrawals from a checking account, paying down a mortgage.

The second secret is to fully utilize tax-advantaged retirement vehicles.

The third secret— forget that you have this money!

Tip # 2 – Reallocate Your Investments.

With the elevated values of equities we are currently seeing, it is a good time to lighten the equity load and add to the bond allocation.

Tip # 3 – Don’t Forget Your Estate Plan.

There are personal savings, employee benefits, and life insurance proceeds that may be available to provide for the needs of the family. But are these funds structured properly? Often they are not. The client’s will, personal asset titling, and beneficiary designations all need to be reviewed to ensure that family needs will be matched by both the amount of funds available and how the funds are made available.

Tip # 4 – Invest For The Long Term.

Success in investments is a marathon and not a sprint. Develop an investment strategy and stick with it no matter what the conditions in the market. Success in the stock market is largely about showing up and sticking to a long term plan.

Tip # 5– Manage Your Debt To Stay Out Of Debt.

Without a strategic debt management plan, you will likely continue to accrue debt which puts you further behind and makes it harder to escape. Debt management includes strategically paying down the most expensive debt first, like credit card debt, then personal loans, then student loans, and then housing debt. However, debt management is also just as much about avoiding future debt and looking for areas to cut back spending or at least, spend smarter.

Tip # 6 – Talk with Loved Ones about Money.

Take some time to build a shared vision of what your future looks like. For parents, take time to teach your children about money. Children learn about money whether we deliberately teach them or not, so be conscious about what money messages your children are getting. Even a simple conversation can go a long way.

Tip # 7 – Review Insurance Coverages.

Review your insurance coverages on a regular basis to ensure that the amounts of coverage are still consistent with your original needs and intent.

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