Australia | Feb 14 2008
By Chris Shaw
As St George Bank notes in its Monthly Economic Outlook for February, the main economic story at present is how strong the Australian economy is at a time of economic weakness in the US.
The bank agrees the US outlook is currently very shaky given the combination of sub-prime credit issues and a weak housing sector is flowing through into broader sections of the economy.
While some question whether the US is already in recession or not, the bank takes the view the question is irrelevant, as either way the US economy is weak and will likely take time to get better, especially given labour market data suggest a worsening trend in US employment.
With US recessions having in the more recent past averaged about 10 months in duration the bank expects the current weakness to continue for at least another six months and this leads it to suggest the run of strong growth in the global economy is drawing to a close.
It is a view supported by recent downgrades to global growth estimates by the IMF but while these revisions show growth still coming in above trend the bank questions whether this will be achievable given the weakness in the US economy.
Those anticipating growth in China and India to make up for the weaker US contribution may be disappointed in the bank’s view, though it makes the argument a slowing in China would actually be a positive as it would lessen the risk of that economy suffering a hard landing, an outcome that would cause even more damage to the global economic picture.
In contrast to the US issues the Australian economy continues to power along on the back of higher house prices, solid retail sales and domestic demand and still high commodity prices, these factors leaving it well placed to withstand any global slowdown.
Looking forward the bank expects continued strength in the labour market but notes there are signs business conditions have peaked. As a result it expects growth to decline to just below trend levels through the course of the year, estimating a GDP outcome of close to 3%.
Even allowing for higher interest rates the bank sees the current housing upturn as continuing and forecasts 5-10% price increases in most capital cities. Perth is the exception as the bank sees lower growth in that market.
While some in the market are expecting the Reserve Bank of Australia to again hike rates in March the bank is not so sure, suggesting a more likely outcome will be a wait and see approach until the next batch of CPI data are available in April. Regardless of the timing of any move it sees no change to the RBA’s current tightening bias for at least several months.
Assuming interest rates in Australia peak around the middle of the year the bank expects that will also prove to be the peak for the Australian dollar, with a first-half average exchange rate of US88c expected before a fall to around US85c in the second half of the year.
While volatility can be expected to continue shorter-term in equity markets the bank takes the view valuations are now reasonable and profit growth should continue, so it sees the market ending 2008 at around 6,300 as measured by the S&P/ASX200 Index. This suggests upside of around 8% from the market’s level as at the end of January.