The Experts

Investor signposts - week starting 20/12/09

The big picture

The festive season kick into full swing over the next week and with most investors in wind-down mode, and it’s worth reflecting on how the economic landscape has changed over the past year - particularly given that the latest round of economic growth figures have come and gone for another quarter.

Earlier this year most discussion centred on the likelihood of a domestic recession. What is now clear is just how close the Australian economy came to experiencing its first recession in 18 years. The latest growth figures have made it abundantly clear what may have been, had authorities not used extensive stimulus to support growth.

The domestic economy grew by a meagre 0.2 per cent in the September quarter, with annual growth holding at just 0.5 per cent. This result was despite interest rates falling to the lowest level in a generation and fiscal policy that was clearly expansionary. Add in the first home buyer boost and the tax breaks provided to businesses and it clearly highlights the domestic impact from the global recession. Under any other circumstance, this kind of stimulus would have seen the Australian economy shoot the lights out.

The important point for consumers and businesses is where we go from here. The good news is that the worst of the global downturn is now behind us. The global financial system has stabilised, China’s economic recovery is complete and there is greater optimism about prospects for the US economy - particularly given the recent improvements in labour market conditions.

Domestically the strength in housing construction will be the key growth driver for the economy over the next year. Importantly businesses investment is starting to trickle back and government spending on infrastructure, and investment in the resources sector is gathering pace.

Over the past year the labour market is on area that has clearly surprised on the positive side. Unemployment has held stubbornly around 5.7-5.8 per cent over the past few months, and it is looking more likely that the peak in unemployment may be upon us. Clearly a remarkable result considering that “full employment” is a figure of 5 per cent. The improvement in labour market conditions should give consumers more confidence to spend despite the expectation that the Reserve Bank will return interest to a more neutral setting over 2010.

The week ahead

There are no remaining “market-moving” domestic economic indicators, so it is all downhill over Christmas and until the New Year. The only domestic indicator of note is the November car sales data, released on Monday. While quarterly financial accounts round out proceeding on Thursday.

The indicator that may prompt most interest is car sales. Industry figures already released reveal that 85,833 new vehicles were sold last month as small businesses rushed the Government’s tax break. Adjusting for seasonal influences, CommSec estimates that car sales rose by around 4 per cent in seasonally adjusted terms.

The government tax rebate has been the driving factor behind the turnaround in auto sales. Sales of business vehicles will continue to support the car industry over the next month. However while sales may ease modestly in the New Year, there is a host of factors that will continue to support the car industry. Upcoming tariff cuts, improving job prospects and the best car affordability in 33 years should give potential car buyers more incentive to go ahead with purchases in the New Year.

In the US, there is a raft of key indicators to provide guidance in a shortened week. On Tuesday, final GDP (economic growth) figures for the September quarter are released together with data on existing home sales, the Richmond Fed Manufacturing Index and home prices. On Wednesday, figures on new home sales, and personal income/spending are released. Closing out the week on Thursday is data on durable goods orders and claims for unemployment benefits.

Most interest will be centred on the home sales data and claims for unemployment benefits. In recent months home buyers and investors have started filtering back into the housing market, reducing the inventory of unsold homes. Also a sustained improvement in house prices will help boost confidence levels, particular in light of the improving labour market conditions.

The jobless claims will be closely scrutinised to gauge if job creation is around the corner. Continuing claims are following initial claims lower and the peak in unemployment is close. CommSec would expect net gains in US payrolls in the first half of 2010.

Published: Monday, December 21, 2009