Australia | Oct 16 2008
By Greg Peel
ANZ economists are now forecasting 1.75% growth for the Australian economy in 2009 and 2% in 2010. The economy was already slowing as we headed into the most recent financial crisis, and there is now a likelihood of a much sharper slowdown. The government has moved away from supporting the export industry and business investment and put money straight into the consumer sector, which should provide a buffer if not the surge the government is hoping for. Nevertheless, with such a large surplus the government still has plenty of supportive petrol left in the tank.
The big risk comes from the commodity sector, ANZ suggests, which represented 25% of profits and investment in FY08. The fall in commodity prices to date, buffered by the falling Aussie dollar, should knock 15% off the terms of trade but there is still scope for an even more damaging correction. There is also a risk of further falls in business investment, a rise in unemployment and a fall in house prices, but ANZ has not sounded the red alert just yet.
The stock market has copped the brunt of the global financial fallout, and “the current bear market is shaping up as one of the worst Australia has experienced,” the economists note. While some sectors have performed better than others, no sector has escaped unscathed. While the roots of the global equity meltdown are many and various, ANZ suggests that “in the end, it all boils down to one simple emotion: fear”.
The global policy response has been significant, although there remains some way to go before credit markets are restored to proper operation, but ANZ suggests global policies are a “major step in the right direction”.
The economists note that the last thirty years have produced six bear markets with an average 36.5% drop, ranging from 11% to 47%. But what they also note is that “the bigger the downturn, the bigger the rebound”. The twelve months after the bear market troughs of the past thirty years have seen an average 27% rise, with the largest being 44% in 1981 following a 38% fall.
This time, as usual, the Australian stock market has been punished just as much as the US stock market, yet ANZ notes “the fundamentals of the Australian economy remain infinitely better than the US and than any other industrialised economy”.
The Australian banking sector is profitable and well capitalised and has shown the value of much more prudent lending practices. The economy in general has entered the downturn from a much greater position of strength to begin with. The corporate sector remains relatively healthy and the intention to invest remains strong. The current labour market has been the tightest for decades.
Furthermore, notes ANZ, Australia’s policy makers have “significantly more scope” to prime the economy if conditions deteriorate. Apart from government stimulus measures, the Reserve Bank retains room to reduce interest rates much further. A level of 5% is now considered by most economists to be “neutral” for economic growth. We are currently at 6.00% down from 7.25%. There is further scope for the RBA to move to a stimulatory stance if it needs to, with 4% possible.
By contrast, the US has a budget deficit rather than a surplus and its cash rate is already 1.5%.
All this adds up to the ANZ’s belief that the Australian stock market is “well positioned to recover strongly”, once current levels of risk aversion finally recede.