FYI | Dec 19 2008
By Greg Peel
What was the highlight of 2008? Probably a little thing now known as the Global Financial Crisis. As far as annual highlights go, it was a biggie.
Under the GFC umbrella, the big issues of 2008, according to CommSec chief economist Craig James, were economic recessions across the globe, stock market disasters, record low interest rates, and a much weaker US dollar. We also had soaring inflation and oil at US$147/bbl one minute, and fear of deflation and oil at US$37/bbl the next. As the credit crunch began in 2007, James had this time last year flagged recession as a likely issue in 2008. James would no doubt be prepared to concede that in raising such an issue he was not at all ready for what was to transpire.
We’ve got the recession, and James suggests recession will remain the big issue for the first half of 2009. In the second half however, he believes economic recovery will become the focus. The key will be confidence.
“While central banks have slashed interest rates and governments are pumping money into economies,” says James, “no one can make consumers spend or businesses invest or hire workers”.
CommSec notes that the US recession of 1973-75 lasted 16 months and expects that the recession of 2007-09 will be on par. This puts recovery in mid-2009 and usually employment turns positive 2-3 months later. Australia will avoid a recession, CommSec believes – just. We have a stimulus package, lower interest rates, home owner grants, lower petrol prices, and increased government spending, but it all means likely a close run thing. Here follows some more CommSec big issues for 2009.
Infrastructure spending, both economic and social, is emerging as a key theme for 2009. In Australia, the $24 billion government package will be used to expand ports and improve rail networks such that we are ready to meet China’s growing demand for resources into the future. An expanding population, however, is stretching demands on social infrastructure such as hospitals and schools.
Infrastructure will also be important across the globe, from the US – where upgrading aging roads, bridges and other facilities is part of President Obama’s plan to drag his country out of recession – to China – where any infrastructure improvements are a catch-up to the developed world.
President Obama himself is seen as an important catalyst in boosting confidence levels in the US and across the globe. The stock market bull run to 2007 began when the US invaded Iraq, but it was expected to be a brief conflict. A withdrawal from Iraq may now help to fuel the next one. A break with the past Republican hegemony could be a great confidence booster.
Disinflation will be an issue. Disinflation means a reduction in inflation growth, as opposed to deflation, which means falling prices. The reflationary policies of central banks across the globe (cutting rates and printing money) should ensure prices will grow in 2009, but at a much slower rate than in 2008.
Rising unemployment will be a major concern. Rising unemployment feeds on itself, as lost jobs means less spending, thus less corporate profits and the need to cut costs through more job losses. The US unemployment rate has been creeping up but will go higher. It should not hit the same double-digit levels of the seventies recession because the seventies marked the peak of the baby boomers hitting the workforce. There are proportionately less young workers today.
In Australia we have the same scenario, as well as an ongoing need to employ skilled migrants. Unemployment should peak at around 5.25% provided Australian companies don’t panic and start mass lay-offs, thus fuelling the vicious circle.
Monetary policy will be under the microscope in 2009, and more interest rate cuts will be forthcoming for those countries not already at zero. Australia’s cash rate should reach 3.75%. But it won’t just be interest rate management that central banks will focus on. The GFC has focused attention on the fact the prices of assets such as shares and houses are just as important as consumer prices. US house prices were allowed to run amok while consumer inflation and thus interest rates remained low. Has such a policy now been proven to be naive?
Carbon trading will be a global issue in 2009. CommSec had assumed it would be the most important global issue in 2008 but the GFC rather took centre stage. With Rudd in the Lodge and Obama in the White House a new approach to carbon emissions is underway and the costs have yet to be realised.
Financial market regulation will undoubtedly play a major role in 2009. Regulators have a long and sad history of always shutting the gate after the horse, and the risk is that GFC anger, particularly from the general public, will encourage politically motivated over-regulation. This will not help a return to a more confident stock market, although it is clear there are transparency issues that must be addressed.
China was an issue in 2008 and will be an issue again in 2009, despite its now obvious slowdown. Efforts to stimulate the Chinese economy will ensure China will begin to see improvement around mid-2009 and it will still be on course to surpass the US as the world’s largest economy in some five to ten year’s time.
So much to look forward to.
