By Eli Greenblat
Wesfarmers chairman Michael Chaney says rampant inflation has probably peaked but warns it will be difficult to reach the Reserve Bank’s target range of 2-3 per cent before 2025 while also predicting several more interest rate hikes.
Mr Chaney said there was a “fair bit of stickiness” in current inflation, exacerbated by supply chain shortages.
The business veteran – a former chair of Woodside Energy and NAB and BHP director – said that while the worst of inflation might be behind us, sustained higher levels of inflation were here to stay for the foreseeable future.
“If you look at inflation for example at the moment the general view is that we’ve probably peaked, whether it’s the US, in Europe, in Australia, but that it’s going to be hard to get back down to the 2 per cent level that Federal Reserve and the Reserve Bank want to get to,” he said in a podcast interview with Future Generation, a fund which focuses on investment and social returns.
“There’s a fair bit of stickiness there.
“And we all know why inflation has occurred. It’s supply chain shortages exacerbated by the situation in Ukraine. And recently we’ve had the oil producers saying they’re going to put a floor under that.
“So I think it’s going to be a while until it comes down and people generally think it’ll be 2025 until we are getting into much lower levels.”
The RBA and its governor Philip Lowe have faced political and community pressure over the speed at which the central bank has hiked rates to combat rampant inflation, but Mr Chaney said the institution was doing a good job at a difficult time. “I think they’ve been in a very difficult position and I think they’ve done a good job in dealing with it,” he said.
“They’ve used traditional methods, obviously raising interest rates if they felt they needed to, having a pause at the last meeting. But it’s always a balance between going too far with interest rates rises and sending the economy into a recession.”
However, the chairman said more rate rises were likely despite the recessionary risk.
“So far they’ve managed to raise interest rates in a way that we still have an economy that’s growing, albeit fairly slowly. But I do think we’ve got a few rate raises ahead of us,” he said.
Wesfarmers relies heavily on consumers for its income, with the majority of its earnings flowing from hardware giant Bunnings and its other retail operations, including Target, Kmart, Officeworks and Catch.
Mr Chaney said in the current environment it had been difficult for its retail businesses to maintain margins, with some inflation and wage growth passed on to customers but its value-focused chains Target and Kmart doing well.
The latest economic indicators are showing a slowdown in consumer spending, although retail sales held up in April, growing by 3.3 per cent year on year.
Some analysts believe retail trading conditions will moderate rather than collapse over 2023, with headwinds including travel spending normalisation and a higher net interest burden being offset by a strong employment market and a still elevated rate of savings compared to the pre-Covid period.
Mr Chaney said the retail sector at the moment was operating “exactly the way we thought it would six months ago”, with a downturn envisaged over the next year.
“I said to (Wesfarmers CEO) Rob Scott the other day it’s one of the few times in business where our predictions about what will happen in six to nine months have come true.
“We’re finding retail and generally the consumer side is turning down.
“And I think that’ll be quite difficult over the next six or 12 months.”
Wesfarmers will hold its annual strategy day on Tuesday. where Mr Scott and other divisional heads are likely give an update of recent performance and investors will be looking for any impact from slowing consumer spending.
Mr Chaney said wider risks to the economy – including fears of an international banking crisis following the collapse of Silicon Valley Bank and regional US lenders – had now eased.
“The American banks are doing their quarterly reporting now and reporting good profits on the whole, and the smaller banks a loss of deposits, in line with what people expected. I think the effect of what’s happened there will be fairly minimal, but time will tell,” Mr Chaney told the podcast, available at the Future Generation website.
He said he expected to see more building and construction companies fail in Australia, but the moderation of inflation could ease the stress on builders who were on fixed-price construction contracts.
