Australia | Jun 14 2006
By Terry Hughes
Morgan Stanley is a renowned uber-bear when it comes to the Australian economy and while Gerard Minack and his colleagues admit to making a few errors of judgement in terms of how long it may take the bear to come out of hibernation, they are convinced it won’t be too long before he begins to stir and that once awake it may take him several years to crawl back into his cave.
On one hand the economists have revised up their 2006 GDP forecasts to 2.5% and 2007 to 1.1%, from 2.2% and 0.9% due to recent economic data surprising on the upside, but on the other hand they say this just serves to reinforce their view that 2007 domestic growth risks are "skewed to the downside."
Significantly, the economists have cut their domestic demand forecasts to just 0.2% from 0.5% in 2007 as it is expected to be slowed down by ongoing residential construction weakness, a peak in the business investment cycle, a softer labour market , household financial pressures and disappearing terms of trade assistance.
OK, so Minack et al underestimated exactly how much cash has been flowing into Canberra’s coffers and the resultant budget that followed, and if consumers decide to spend this extra cash then clearly domestic demand will be higher, the analysts concede, but on the flip side of this, their forecasts assume that global growth holds, which it may not.
As a result of these expectations, the economists predict looser fiscal policy and lower rates, which will in turn point to a lower Australian dollar.
The first interest rate cut is expected sometime during the March quarter with a such as 150-200 basis points being cut over the downswing, the economists say.
This is expected to push the AUD down to around the mid-60c range.
If all this wasn’t depressing enough, Minack points out that he most important implication of all this is the impact on corporate earnings. On a top down measure, he expects a double digit decline, which he says would be "poison to an equity market that is now, in our view, riding an earnings bubble."
Presumably this is why Morgan Stanley is forecasting an ASX200 at 3,000 in 2010, down from today’s 4,762.