The GFC – only good for fish and chips?

With both the Australian and US equity markets climbing back over the technical barriers to a return of speculative investments, it might be thought that the worst is over, the GFC is now only “good for fish and chips” news history and we are all supposed to rest assured that elections in the UK, US and Australia will keep stimulus packages in place.

With Starbucks and MacDonald’s regaining their confidence, especially from their international markets, there is a real danger of over optimism that we are back on the track to real recovery.

Consumers are not so easily fooled, expecting that there will be a continuing pressure for them to find ways to cut the extras and move back to a more simple lifestyle. Retailers will find that sales and discount offers are attractive and households are going to cut back on luxuries, lattes and leisure travel to restrain the increase in their personal levels of debt. Business orders will be constrained by reductions in customer interest in extras and on-costs as their interest bills go up and their profits go down.

According to Gary Morgan, Consumer Confidence is now 124.4 (down 2.6 points in a week), according to his Consumer Confidence Rating conducted on the weekend of April 10/11, 2010. The Consumer Confidence rating is now 21pts higher than a year ago, April 11/12, 2009 (103.4). The fall has been driven by falls in confidence among Australians about the economy over the next 12 months and about the purchase of major household items.

Bill Evans says that the Westpac survey of 1,200 consumers tells a similar story, with a fall in the level of consumer confidence; although like the Morgan index, overall levels of confidence are back to above average overall levels.

Central bankers are concerned about the flood of liquidity that has been pumped into the world economy by the GFC pandemic and are only too aware that the “too big to fail” era is being followed by the “the bigger you are, the more taxpayers money you will get” problem. The debt overhang will be significantly carved back in the next financial year.

This means that the RBA will continue to push interest rates up to “normal levels” and take a “national interest” view of a threat to the steady rise in the value of our dollar, while creating a de facto credit squeeze on small business and the household sector.

As indicated in earlier Futurist blogs, the best evidence of market expectations is the continuing surge in the gold price, presumably because in central banks around the world they’re stocking up on the precious metal as a hedge against inflationary pressures.

With China’s national growth rate of over 10% and its determination to resist pressures to raise the value of the yuan, Glenn Stevens is likely to take the view that a steady rise in our household interest rates and a tough line on the May budget will become essential features of the next few months activity.

China’s central bank said recently that it expected the dollar to strengthen this year, but it raised the spectre of worldwide asset bubbles and inflation. In a lengthy report on the global financial markets, the People’s Bank of China also warned that huge, hidden bad bank loans in the West could pose a threat to the global economy. The bank says that: “Once the real economy turns for the better, the massive liquidity being released will definitely add to inflationary pressure. It is an urgent task faced by central banks in the world to avoid the forming of asset bubbles and inflationary pressure”.

In the US, Ben Bernanke has promised Congress that interest rates will be kept down this year until after their mid-term elections and in the UK all parties are talking about having to haul in the deficits and/or massively cut services as the stimulus packages are cut out.

Smart companies will watch with interest the European contagion and the UK elections before a headlong rush into over-optimism as we are likely to see a continued period of instability as governments prepare budgets that claw back deficits and stimulus packages. Consumers are going to react to increases in taxes and central bankers who are going to want to jump all over inflationary pressures.

Now is the time to prepare for next year’s financial constraints, difficulties in achieving stronger market penetration in the export market and the resurgence of industrial relations pressures by workers seeking catch-up payments.

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Dr Colin Benjamin is an entrepreneurship and strategic thinking consultant at Marshall Place Associates which offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship.

Email dr.colinbenjamin@marshallplace.com.au
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