5 Hot Topics Australia

24 August 2009

The Australian economy has held up far better than most expected despite all the dire predictions at the beginning of the year. While most of the developed world caught the flu, Australia only suffered a bad cold. And, in our opinion, it is largely based on an economy that was well managed before 2008 and an Asia region recovering quickly.

Expect Australia’s turnaround to be quicker and stronger than most of the developed world. The following are five “hot reasons” supporting our view:

Strong Economy – One of the first steps taken by the Rudd Government as the Global Financial Crisis (GFC) unfolded was to guarantee bank deposits and introduce stimulus packages. As the GFC was devastating housing markets overseas, there were suggestions that our housing prices could fall as much as 30% and unemployment may reach 10%. It has not happened yet (touch wood). With interest rates at 40-year lows, demand still buoyant and consumer confidence returning, we expect the economy to continue weathering the GFC better than most developed countries.
Strong Asia - Asia continues to grow apace. There are many signs that it will recover quicker than the rest of the world from the GFC – and that this growth will be sustainable. We strongly believe Australia fortunes are linked to Asia as the demand for our commodities grows in line with Asian growth. This is evident in the recent $50 billion gas project signed with China and price strength for many agricultural products for our still important primary producers.
Strong Banking System - A healthy bank sector has ensured credit has kept flowing to housing and consumers. It has also ensured that significant amounts of capital have not been drained from the system to repair the banks’ balance sheets at a cost to other industries. The health of the banking system is closely linked to the level of unemployment and whether the housing market remains buoyant.
Unemployment – this remains the key risk to the health of the economy. In our opinion unemployment is only a lagging statistic when the recession is not credit lead, like this one is, placing more importance on the jobless level. Many employers have been more cautious about laying people off in the past year. If this trend continues then unemployment will remain within acceptable limits, with the obvious positive flow-on effects to the housing market, consumer and limiting demands on government welfare spending.
Superannuation – As the economy remains relatively strong and unemployment remains in check, there will be continual inflows into Australia’s A$1 trillion plus superannuation industry. This money will provide much needed support to the stock market, assist the Federal Government to fund the deficit and investment in infrastructure projects. This forced saving will provide our capital markets with a source of funds without relying heavily on offshore inflows.