Call us on 1300 794 893

Your Money

What's in store?

One of the scariest tasks someone like me can set themself is trying to predict the future. But someone has to do it so it may as well be me.

I have had some help as the Treasurer has pulled out his crystal ball lately and even the Reserve Bank has had a shot at tipping the future.

State of play
Let’s look at the local economic setting first before heading overseas.

We have been growing at or around 3-4 per cent for some time but the pointy-headed number crunchers in Canberra think we’ll end this financial year at about 3.5 per cent – but this will slip down to 2.75 per cent next year.

That doesn’t look too bad and should only have a small negative impact on unemployment.
High hopes

Treasury says the jobless rate will go from 4.25 per cent to 4.5 per cent over the course of the year, but I think this could be wishful thinking. Bank economists are wagering a rate of around five per cent and even this could be a tad optimistic.

There are a lot of negative numbers around at the moment and I can’t see a real lot of positives to bolster consumer and business confidence.

The politics of money

The real fly in the economic ointment is inflation and Treasurer Wayne Swan’s team sees it trending down from four  per cent this year to 3.5 per cent next year. This would imply that interest rates should come down.

Forecasts by NAB see the cash rate of interest set by the Reserve Bank coming down from the current 7.25 per cent to around 6-6.5 per cent over 2009, but the course of inflation will determine this one.

Supply and demand

Ominously, the Reserve Bank has inflation holding up at four per cent and as demand is slowing locally, the impact of high oil prices will determine our inflation rates and our interest rates.

Worse still, ANZ now thinks we could see two more 0.25 per cent increases this year! They are in a minority but again it can only be blamed on their views on oil prices.

Blue sky mine

What is really interesting is that we have a dual economy. The mining states of Western Australia (WA) and Queensland are booming, while the likes of New South Wales, Victoria and Tasmania are finding the interest rate rises and the stock market slump heavy going.

Seven year itch

That 2.75  per cent economic growth is propped up by WA plus Queensland plus mining and so there will be parts of Australia that will be hovering close to contraction or even recession!

Craig James, the CommSec chief equity economist actually inferred this was a possibility this week.

“All the indications so far point to a very weak start to 2008 by the Australian economy,” he says. “In fact, it’s possible that the economy may have even gone backwards in the March quarter – the first time that has happened in seven years. That is, since the GST introduction period.”

Falling figures

James points to retail trade falling by 0.1 per cent in the March quarter and net exports (exports minus imports) are likely to have sliced 0.5 percentage points off GDP growth.

This will mean that the Reserve Bank’s interest rate policy is working, probably too well, and it should keep the Reserve on the sidelines until August. The next inflation number comes out on July 23 and it better show some promising signs that inflation is coming down, but it looks less likely, with oil sitting around $US130 a barrel.

The tipping point
And oil could determine our future but its future is not clear.

On one hand many experts think it is a bubble waiting to burst, which will send it plummeting down to US$50 a barrel. On the other hand, Goldman Sachs has it spurting up to $US200! The timeframe is over two years and if it should happen soon, I’d tip a global recession, a big jump in unemployment and bankruptcies.

Of course, it wouldn’t happen straight away, but would follow ever more increasing interest rates, which would be followed by rapidly falling interest rates as recession takes grip.

Home and away

My guess is we will see lower oil prices over the next few months as the US recession becomes more pronounced. Warren Buffett thinks it won’t be over in a hurry, though he doubts whether economic statistics will truly show the recession in parts of the US.

I think the same is happening here.

This economic scenario will weigh down on global and local stock markets and it will take us some time to go past the most recent high on the stock market’s S&P/ASX 200 of 6792.

Rise and fall

From January to March this year, we lived through overreaction and excessive sell-offs on the stock market. Now we have retraced some of those excesses. We now will see ups and downs, as bears and bulls work out how long the US will be in recession.

Handle with care

I think there will be a positive end to 2008 and the share market in 2009 will progressively work its way to the positive, preparing for a much better year in 2010.

That’s why I recommend buying great blue chip companies – 20 is better than 10 – and hold them. And buying them when things look dodgy can be rewarding in the long run, but they have to be great companies with great management. That’s Buffett 101!

Published on: Thursday, May 29, 2008

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300