Five predictions for the new financial year

The 2009-10 financial year has now arrived and after a rough 12 months for SMEs struggling to survive the global financial crisis, many are eagerly awaiting an economic recovery.

Here are some of the major predictions made by leading forecasters for the 2009-10 year, and take heart – the news isn’t as bad as you may think.

While the last 12 months have seen collapses and volatility, 2009-10 is likely to be a year the storm calms and businesses begin to emerge for some cautious recovery.

Property

The downfall of the US economy was led by the property market, but Australia has so far managed to avoid any similar catastrophes.

In fact, all the data points to the housing industry pulling the national economy out of a downturn. Recent figures from RP Data show housing prices have increased by 3.9% over the past 12 months, nearly wiping out any losses from 2008.

Research director Tim Lawless said the news is an indication that recovery has arrived to the residential property sector, and that there are signs investors will begin to return towards the end of the year.

Meanwhile, Melbourne, the country’s second largest property market, has experienced auction clearance rates of above 80% for the last five consecutive weeks.

While some suggest the increased activity is due to first home buyers flooding the market looking to take advantage of the Government’s increased grants, Real Estate Industry of Victoria president Adrian Jones points out that first home owners do not traditionally buy at auction.

Jones agreed with Lawless, and said the news is a sign the housing market is now entering earlier-than-expected stages of recovery.

But Louis Christopher, head of property research at Advisor Edge, says that while the industry is entering a recovery phase, it is important to understand how the market will behave when the Government’s grants disappear.

“There’s already evidence that the number of first home buyers is reducing, so what happens when the grant goes and how does the market respond to continuing rising in unemployment? So how will the market perform if we have 9% or 10% unemployment? How is that going to impact on house prices? I’m less optimistic compared to my counterparts who say the market will ignore that, I don’t see how it could.”

Interest Rates

Until September, the official interest rate remained at 7.25% with the Reserve Bank worried about inflation. But with the collapse of Lehmen Brothers issuing in a new stage of economic turmoil, it quickly reversed its policy and quickly acted to stimulate the economy.

The RBA has cut the official interest rate by a massive 425 basis points since last September to a 40-year low of 3%, with forecasters suggesting more cuts to come.

CommSec chief economist Craig James said the RBA will continue to cut rates to stimulate the economy if necessary.

“While the Reserve Bank has signaled it has done enough for now, the central bank appears open to the prospect of another small 0.25% rate cut in coming months if it proves necessary to generate a ‘durable’ economic recovery.”

Westpac chief economist Bill Evans has revised the bank’s previous forecasts, saying the RBA will now drop rates to a low of 2.5%, with two 25-basis-point cuts to come over the next six months.

Evans says that the revisions are due to beliefs that unemployment will now peak earlier in 2010 than previously expected, and that activity in the banking sector for housing finance has been high, following large rate cuts.

Additionally, he said, “Concerns with the tractability of the recovery, which to date has been supported by the fiscal stimulus and record rate cuts, may also result in further rate cuts”.

Economic Growth

Economists across the board were stunned when Australian Bureau of Statistics figures last month showed Australia’s GDP actually grew by 0.4% in the March quarter – but the good news may not last for long.

Expectations for GDP growth have been varied across the board. The Government has been criticised for its generous figures of two years of 4.5% growth starting from 2011, while other forecasters have produced much more restrained predictions.

But the Government could be on to something. The International Monetary Fund recently released a report suggesting growth will contract by 0.5% this year, followed by 1.5% growth in 2010.

The RBA goes further, suggesting 2% growth in 2010. While the OECD only predicts 1.2% growth during 2010, it admits that forecasts for the country are “wrought with uncertainty”.

“A more adverse external situation cannot be ruled out if the financial disorder lasts longer than expected. But a faster, more sustainable upturn in the Chinese economy would also spur a stronger recovery in Australia,” it said.

Unemployment

While some sectors of the economy will begin to recover over the next six months, most economic forecasters say unemployment will continue to rise.

But while the Government has remained pessimistic, keeping to its forecast that unemployment will peak at 8.5% in mid-2011, other forecasters have indicated some earlier than expected recovery.

Access Economics principal Chris Richardson said last month his firm revised its peak unemployment forecast, dropping it from 8.5% to 7.5%.

Westpac senior economist Anthony Thompson has said in a statement that while unemployment will remain high, it has still lowered its forecasts.

“Our revised forecast profile has the quarterly average unemployment rate rising to 6.8% in the third quarter of 2009… to 7.7% in the first quarter 2010. With the earlier and higher turning point in annual jobs growth now predicted, our late 2010/early 2011 forecast for the unemployment rate peak has been revised down from near 9% to 8.2%.”

CommSec chief economist Craig James points out that while unemployment is expected to rise, “more flexible practices by businesses such as trimming hours and pay will prevent the jobless rate hitting the highs reached in past downturns”.

Share market

Markets around the world have been wiped out by the financial meltdown. The benchmark S&P/ASX200 index lost 24.2% in value over the past year, dropping from a July 2008 high of 5138.9 points to a five-year low in March of 3154.5.

The year has been a terrible one for shareholders, but recent signs of recovery suggest the year ahead may provide some good opportunities for investors.

Fidelity Investment head of Australian equities, Paul Taylor, said in the Australian Financial Review there are still very good long-value deals available if investors are willing to look for them.

“This is very much an environment where the winners win big and the losers lose big,” he said.

Forecasters predict the health of the market will depend on economic data and consumer sentiment. With the reporting season set to start in one month, good financial results could give rise to a market recovery.

Craig James, chief economist for CommSec, says that when 2008-09 is compared to previous years, the situation doesn’t look so bad.

“It is likely that a period of consolidation will occur in the next few months as investors become more convinced by recovery prospects.”

“CommSec expects the ASX 200/All Ordinaries to end 2009 at 4250. However it is important to remember that the sharemarkets of developed countries such as Australia have closely tracked US markets over the past year. It is possible that the correlation will break down over time, creating the prospect of out-performance by Australian shares given the dependence of our economy on China. But that is likely to be a few more months off yet.”