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June 2015
Firms' Investment Decisions and Interest Rates
Firms typically evaluate investment opportunities by calculating expected rates of return and the payback period (the time taken to recoup the capital outlay). Liaison and survey evidence indicate that Australian firms tend to require expected returns on capital expenditure to exceed high ‘hurdle rates’ of return that are often well above the cost of capital and do not change very often. In addition, many firms require the investment outlay to be recouped within a few years, requiring even greater implied rates of return. As a consequence, the capital expenditure decisions of many Australian firms are not directly sensitive to changes in interest rates. Furthermore, although both the hurdle rate of return and the payback period offer an objective decision rule on which to base expenditure decisions, the overall decision process is often highly subjective, so that ‘animal spirits’ can play a significant role.
Why Is Wage Growth So Low?
Wage growth has declined markedly in Australia over the past few years. At the same time, stronger growth in labour productivity has worked to contain growth in labour costs. These developments reflect several factors, including spare capacity in the labour market, a decline in inflation expectations, a lower terms of trade and the need for the real exchange rate to adjust to improve international competitiveness. The size of the decline in wage growth has been larger than simple historical relationships would suggest, which might be explained by various characteristics of the current episode.
Developments in Thermal Coal Markets
Thermal coal prices increased markedly over the decade to 2011, driven by a substantial increase in global demand. That led to significant investments in thermal coal mine and port capacity, particularly in Australia and Indonesia. The resulting increases in the seaborne supply of thermal coal have underpinned a significant fall in global thermal coal prices. However, an easing of the pace of growth of global demand for thermal coal, reflecting a move towards cleaner energy sources and a slowing in the growth of aggregate electricity demand, has also weighed on prices. The outlook for prices and production over the next few years depends on a number of factors, particularly the response of Chinese demand to policy measures.
Potential Growth and Rebalancing in China
In rapidly growing emerging economies such as China, it can be difficult to distinguish changes in long-term trends in growth from short-term macroeconomic cycles. This article provides a narrative account of recent phases in Chinese economic growth, and explores the role of cyclical and structural factors in shaping China's recent growth performance. It reviews evidence documented by Lu and Cai (2014) suggesting that the slowing of GDP growth in recent years has resulted from a decline in the potential growth rate rather than being a cyclical downturn. The article emphasises the positive impact that reforms which raise labour force participation and productivity could have on the growth of potential output in China. It suggests that ‘rebalancing’ the economy's demand from investment and exports towards consumption may not be sufficient to prevent a decline in potential growth but that, at a minimum, such rebalancing would probably be conducive to a more stable macroeconomic cycle.
Banking Fees in Australia
The Reserve Bank has conducted a survey on bank fees each year since 1997. The results of the most recent survey suggest that banks' fee income from both households and businesses rose moderately in 2014, predominantly as a result of balance sheet growth, rather than increases in fees on loans or deposits. Overall, developments in banks' fee income followed similar patterns to 2013.
Structural Features of Australian Residential Mortgage-backed Securities
This article provides a summary of structural features typically found in Australian residential mortgage-backed securities and their evolution over the past decade. Understanding the structural features of the securities is essential to the effective risk management and valuation of the securities because these features determine how the risks of the securitised mortgages are borne by the different investors in the securities.
Wealth Management Products in China
Wealth management products (WMPs) in China are investments that offer fixed rates of return well above regulated interest rates for deposits and are often used to fund investments in sectors where bank credit is restricted. They are typically actively managed by banks, with other firms commonly used as ‘channels’, but few are recorded on banks' balance sheets. A key concern about such products is the moral hazard created by a history of banks bailing out unguaranteed WMPs.
Recent Developments in Asset Management
The global asset management industry has grown rapidly following the global financial crisis. International standard-setting bodies and national regulators are working to better understand and, if necessary, address potential financial stability risks from this industry. A particular concern is that, in the event of a significant negative shock to current favourable conditions, some funds may experience substantial redemptions, and so be forced to engage in asset ‘fire sales’ that could be destabilising for the financial system. This article provides background on international developments, as well as some Australian context.
Skin in the Game – Central Counterparty Risk Controls and Incentives
The increasing systemic importance of central counterparties (CCPs) has seen recent policy debates focus on the ability of CCPs to withstand a crisis effectively. CCPs maintain prefunded financial resources to cover the potential losses arising from the default of a clearing participant. This article discusses the incentives created by the composition of these resources, and draws out the role of transparency and governance in ensuring these incentives are effective.
The graphs in the Bulletin were generated using Mathematica.
ISSN 0725–0320 (Print)
ISSN 1837-7211 (Online)