It’s a brave call not to be pessimistic in this environment. Analysts appear to be falling over themselves in the bearish stakes and while the news flow is undoubtedly bad, I think looking into next year there are some good reasons to be feeling comparatively optimistic about things.
I know uncertainty is high but there are some very good reasons to believe next year will be party time for those with safe jobs. Here’s why:
- Australia typically has not had a recession unless we’ve had to deal with a housing inventory overhang (such as in the US currently) or a business investment glut. We’ve had neither. There is no doubting that both of these sectors are set to post sluggish growth in the near-term, yet I don’t think the stars are aligned for a complete collapse in activity sufficient to throw the economy into recession
- In past recessions, policy ineptitude played a large part in driving the economy into recession. This time round both monetary and fiscal policy have worked hard and fast to forestall the worst
- Importantly the real cash rate is currently close to zero. It has rarely been lower
- Yes, home lending has been weak and house prices have fallen, but that’s in response to the discount variable mortgage rate pipping 9% and a real mortgage rate of over 5%
- The credit crisis has blunted the usual transmission mechanism and credit has tightened. That said, it hasn’t frozen up — business credit growth is still robust overall. Further, compared to the cost of funding, mortgage rates remain high and so should continue to fall. Already the discount variable rate is 7% and 3 year fixed rates are about 6.9% (both lowest since mid-2006). The real mortgage rate is about 2%. Home lending is set to accelerate
- As spreads normalise we should see the variable mortgage rate approach 5.25% (lowest since 1965) if the cash rate hits 3.5% or 6.25% (lowest since 2002) if cash only hits 4.5%. Either way, it’s a great environment to gear-up
- House prices tend to respond to free money by rising — so do stocks. This should stimulate housing construction activity and buttress household wealth. Both of which also argue against a recession
- A modestly rising unemployment rate should prove no obstacle — in 2003 when house prices peaked, the unemployment rate averaged 6.2%
- So I reckon third quarter 2008 to the first quarter of 2009 will prove to be a period of ongoing consolidation and household balance sheet repair. House prices will probably continue to fall through the third quarter and into the fourth quarter, before a pick-up in first quarter 2009 and beyond
- Global growth is still a big swing factor. If it completely capitulates then clearly the above analysis changes — the unemployment rate will surge. No one is going to borrow if we’re headed for a depression. So this is what we have to track to see whether I’m on the right path. But barring Armageddon, I reckon things don’t look disastrous for Australia
The point is a zero real cash rate is a rare event — it should stimulate domestic demand sufficiently so that we avoid recession. The 90-94% of those still in jobs will probably never have it so good again.
It seems to me that the author has decided on the outcome beforehand.
If you have a biased opinion – say, real estate investment will increase – then you can think of many “valid” reasons to sustain your view.
Too bad the school of economics does not teach students common sense. If it did, maybe today’s economists would provide better advice and estimates.
The author fails to see that the AUD is weak for a reason – because the demand for our commodities has weakened considerably. So, yes, in theory the exporters would benefit – but in reality they are not better of, because the volume exported has and will decrease. On the other hand all importers will suffer, meaning much higher costs. Considering the negative balance of trade, Australia really needs a strong dollar, not a weak one to do well.
The other big negative is the down trend of asset values. So if the buyers know that asset prices are going down, why should they rush in and buy? We are in the midst of a de-leveraging process, and until it fully unfolds, I do not believe there will be a turn of sentiment.
Many people compare the current environment with the last x number of years and previous recessions. The problem is the current conditions do not have any recent comparison, too many things are bad concurrently.
Just look at the panic showed by RBA and our Government, and you will agree that we are in for a tough period ahead. I have no doubt we are headed for a recession, together with the rest of the world. The only questions are: how deep and how long?
I wrote this in response to Bernard Keane’s piece. Applicable here too I think and it would be good if you agreed and got behind it:
Good stuff as far as it goes, but what really needs to be said is that the government’s worthy but plodding efforts and the Opposition’s idea-free populism (as if it were Opposition politics as usual despte the financial crisis threatening the real economy) misses the need for imagination, creativity – and some old but not recently mentioned measures – to get today’s cash and credit from its private and corporate owners into the spending which will keep up GDP in 2009. So, how about a bandwagon for ideas (assuming that the Opposition die hards won’t keep the government frightened of deficits when now is clearly the time for a couple of years of deficits) which might start with an extra teacher for each 200 students in all schools, trainee nurses’ aids for every hospital, relief over the Christmas season for cooked and processed foods from GST (merely an extension of the uncoooked food exemption to encourage reasonably cashed up grandparents to give the famly a treat), vouchers tradeable online (for those who don’t have computers the local library will do) so anyone who aggregates say $8000 can get a subsidy for building renovations starting within two months, declining by $500 each two months, etc. etc.
And what about encouraging investment in things and shares by allowing a 15% reduction of the cost base for GST purposes in the next two months, declining by 3 per cent each two months.
Encouraging and enlisting private money to be spent NOW is the main game now and the $10.4 billion package is insufficiently targeted. Half of it will be nothing but a transfer from one lot of present and future taxpayers to people who don’t need to spend it and will simply add to savings or reduce debt. By contrast the incentive measures will get at least some money spent from that vast reservoir of credit, the unmortgaged or nearly paid off house
What a load of rubbish. If cash rates fall that low, yields will be too tiny to attract foreign capital.
We rely on foreign investment to keep our economy going.
So one chooses to save ones wages over a lifetime and keep it safe in a Bank. Interest rates pay modest returns, but one thinks,” well its in a bank , and it’s safe.” I chose to have a modest house. I chose to pay it off. I choose to live modestly. Now others chose hugh MacMansions and home loan and credit debt to match. And the Macmansionites borrow off the Bank-my money is part of that ‘loan.’ Now the Macmansion folk want my money to support their inflated house prices, and they want my money at cheap rates to support their greed. So my income goes down;dramatically, and Mr and Mrs Macmansion retain their inflated home at the expense of my fixed bank interest return. I’m so annoyed that my savings are propping up Manmansion greed. Pay the owner the Capital return via interest . Interest heading towards 0% ? Not with my money! I didn’t save hard for your benefit and cut my standard of living for you all to live in a home you can’t afford!