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Outlook for '09

A recent survey by the Mortgage and Finance Association of Australia showed the economic slowdown, to date, has not bitten with the ferocity tipped in many newspaper and other media outlets. Hopefully this is a sign of things to come as better-than-expected economic news dribbles in over the first half of 2009.

Look to Wall Street

And while I expect the local economic and business news will surprise many on the positive side, the main focus for investors, business owners and people worried about their jobs should be on the global economy. In particular, what happens on Wall Street on a sustained basis will prove to be the best, shortcut indicator of whether the worst is behind us.

America was the first to go into recession and it’s emergence out of the downturn is the most anticipated economic development for everyone who would like to be described as bulls on shares.

It’s good to see that the US stock market has returned from Christmas in a positive mood. In the eight trading days since December 25, the Santa Claus rally has seen the S&P 500 index rise by close to 8%. That’s a great start but my chartist buddies still warn that a testing of the old lows seen in November is still on the cards.

Weigh in

Chartists or technical analysts look at the ‘weight of money’ numbers to see if the trend is pointing to buying or selling. The buying to date hasn’t been convincing and with an avalanche of bad economic news expected in the USA over the next three months, there is bound to be big tests for Wall Street to pass before we can say the bear market is over.

Good news among the bad

On Tuesday or January 6, the services industry index in the USA came in a lot better than expected but this followed the December consumer confidence index in a historical low. However, the stock market shrugged it off and went higher. That is a good sign and positives like these are starting to build up but they are overshadowed by the skyscraper of bad news.

Another plus sign is the fact that the Yanks are now starting to see lower home loan interest rates under 5% and this will help the housing sector there to get out of the doldrums.

Australia OK

Here in Australia we have seen our interest rate cuts be relayed through to everyday Australians with a home loan and this is why our economic future looks a little more rosy than most other countries.

The Mortgage and Finance Association’s survey found that more than three quarters of households reported that they were easily meeting their mortgage repayments. And get this, one in four households thought their financial situation had improved in the past year.

Our economic downturn problem is more linked to the high interest rates of early last year than it is to the financial market meltdown and global economic collapse. Of course, the lower mining prices and reduced export income will add to the slowdown and panicky firms cutting workers will also hit the economy this year but there is a good chance that we will miss a technical recession. This refer to six months of negative economic growth.

Different opinion

While I am more positive on our future than most commentators I still believe in realism. So, let’s look at the views of Macquarie’s interest rate strategist — Rory Robertson — so you can see another point of view, which might help you with your money plans.

Robertson thinks we could already be in recession but he is at odds with the Reserve Bank, the Treasury, the OECD and other economists such as Craig James from CommSec. However, there are other economists who agree with him. This is a line ball game and I hope he is wrong.

“Canberra has done what it can - moving quickly and forcefully - to limit the damage, but the deepening global recession and the commodity-price boom turning to bust suggest that recession in Australia may be unavoidable,” he told me before Christmas. Since then commodity prices and shares have picked up, which could be another positive sign.

Employment factor

For most of us a recession’s greatest threat is to our jobs. Currently, unemployment is at 4.4% but even Robertson is not too negative on how high it could go.

“The timely and forceful policy efforts by the RBA and Canberra mean that Australia's recession will be shallower than it otherwise would have been,” he predicted. “Unemployment probably will rise by several percentage points from recent generational lows, but by much less than if policymakers had sat on their hands.”

Craig James has a more positive take with an expectation that we will grow by 1.5% this year but he still is cautious.

“The year ended with the economy starting to respond to a raft of monetary and fiscal stimulus measures, retail discounting and cheaper fuel prices,” he said. “The Australian economy looks set to avoid recession, but it will go close given the sheer number of global economies in, or approaching, a recession.”

Market bounce
That said he thinks share players will have a much better year.

“CommSec expects the ASX 200 to rebound to 4,700 by end 2009,” he tipped. “And while we believe that fundamentals support a recovery like that seen in 1975 and 1983, we also acknowledge the fickleness of investor sentiment.”

For obvious reasons I hope Craig is absolutely spot on!

Published on: Thursday, January 08, 2009

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