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The two-speed economy

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by Peter Switzer

All too often we hear economists and media commentators refer to the Australian economy as two-speed. They argue the mining-related sector of the economy isn’t only set to do well but it will be at the expense of the bigger, slower sector of the economy.

The losers could be called the non-mining sector, though there will be some winner industries that have little to do with mining.

With many business owners and consumers absolutely rocked by the Cup Day interest rate rise, I thought it timely that I recommend all businesses take stock on how the economy is going to treat your business over the next year or so.

Before engaging a small business audience on best practices in Aussie businesses, I always begin by giving a snapshot of the economy. Traditionally it would look at economic growth followed by unemployment.

I make the point that if you had a choice of customers with or without jobs, ones with jobs are generally better.

Next, I take a guess at interest rates based on consensus forecasts and then go for some thrill-seeking by predicting the Oz dollar. This comes with exhaustive warnings about how hard it’s to forecast the currency but I do have a crack at it.

2011 to be different

My argument for starting with an economic summary is that you could respond differently to marketing, hiring and capital spending if you expected a booming economy or a recession.

However, this year is different. In 2011, we expect trend growth around 3.25 per cent but your industry could be in recession.

Of course, it always happens that some sectors can be doing poorly when most of the economy is doing well, but in 2011, as could be the case now, more parts of the economy could be doing badly than are going gangbusters.

And you can blame China and its impact on the Aussie dollar. An accessory after the fact is the Reserve Bank and its aggressive interest rate strategy, which collectively has added to the problems of a two-speed economy.

Right now the manufacturing sector is contracting if you can believe the Australian Industry Group – PricewaterhouseCoopers Performance of Manufacturing Index. Meanwhile the services sector, which is the country’s greatest employer, is also contracting.

Tourism has been crushed by the rocketing Aussie dollar and interest rates have KO’d the building and housing sectors. Borrowing is down and even credit cards are on the nose.

Look for opportunities

This is the real life story of a two-speed economy and while business owners have to recognise the challenges of what lies ahead, I’m not telling you this to encourage you to go into your business shell.

No, being forewarned is to be forearmed and many great businesses emerged or grew spectacularly out of recessions and downturns. In tough times, the lateral thinkers learn how to reduce costs and to get the biggest bang from their buck.

The wise entrepreneurs will look at every cost, rally their staff and think about how they can leverage off the China boom or find customers in the mining sector.

I was talking to an investment analyst recently about the challenge of buying online overseas by Aussies thanks to the strong dollar.

He argued while a company such as JB Hi-Fi would lose customers, so would the whole industry, but he thought this company would do OK because its business model means it will acquire greater market share, as it will lose relatively less compared to its rivals.

This is the time for ‘exceptional’ to become the new normal for anyone determined to build an enduring brand for the future. Know what you’re up against and then do everything to crush any obstacle that gets in the way of your business dream.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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Published on: Friday, December 03, 2010