Economy 2009: 10 key forecasts

There are several key elements affecting the overall economy, and the stability or otherwise of each can be integral to your business’s viability for the year ahead. JAMES THOMSON surveys the likely scenarios.

Australian entrepreneurs have started 2009 with one word ringing in their ears: Recession.

Last year we watched as financial markets across the globe went into freefall, but this year the real economy looks set to suffer, as households stop spending, workers get the sack, and businesses are pushed to the brink of collapse.

It’s going to be rough; but there are still some bright spots for canny companies. Export markets should hold up well, the housing sector looks set for modest growth, and interest rates will keep falling.

To help you steer through the mire, SmartCompany has compiled the 10 crucial economic forecasts for your business in 2009.

1. Economic growth

So will we actually fall into a recession as defined by two periods of negative GDP growth? Almost certainly. Most economists believe the economy contracted in the December quarter of 2008 (we’ll get the official confirmation of this in February) and is also likely to contract in the first three months of 2009.

AMP Capital Investors chief economist Shane Oliver is tipping a mild recession as households in Australia and around the world stop spending and reduce debt. But he leans towards an improvement in the second half of 2009 or early 2010.

“Global recession during the next six to nine months (will be) made worse as households in rich countries reduce debt levels. However some sort of recovery should start to become visible during the second half, or at least in 2010. Some of the conditions for global recovery are falling into place, such as falling oil prices, falling inflation, falling bond yields and fiscal and monetary stimulus.”

Most economists are expecting Australia’s GDP will grow between 0.2% and 1.5% in 2009, compared with growth of around 2.25% in 2008. The outlook for 2010 is somewhat better, with economists tipping GDP growth of between 1.7% and 2.5%.

2. Unemployment

The biggest question mark over these economic growth forecasts is the unemployment rate. If unemployment were to rise sharply from the current level of 4.4%, then households will be hit hard and the recession could be deeper than first expected. Stephen Walters, chief economist at JP Morgan, describes households as the Achilles heel of the Australian economy.

“After an extended spending splurge, households embarked on a period of austerity in early 2008. Confidence since has collapsed, owing to plunging equity prices and the onset of global recession, [and] the main headwind for households currently is rising unemployment.”

Walters expects the unemployment rate to double to 9% by the end of 2010, while Westpac chief economist Bill Evans is far more optimistic, forecasting the unemployment rate will rise to 5.3% by the end of 2009 and 6.1% by the end of 2010.

3. Business investment

The key to just how far the unemployment rate rises will be whether businesses are willing to continue to invest and employ. While most economists agree business is far better placed (mainly thanks to lower debt levels) than in previous recessions, difficulties in securing credit and falling commodity prices have severely dented confidence.

“If, as we expect is happening in the US, businesses change their operating model from profit maximisation to debt minimisation and cash hoarding, then Australia’s growth prospects are precarious,” Evans says. “Businesses would persist in delaying investment and hiring, which would in turn intensify households’ concerns about job prospects.”

Evans is predicting business investment growth of -6% in 2009 and zero in 2010, while Walters is predicting a fall from 11.4% in 2008 to -5.1% in 2009 and -7.8% in 2010. But it is worth noting that there are clear risks that the slump in business investment could be far greater – as Evans points out, business investment fell by 20% in 1990 and 1991 during the last recession.

4. Public sector spending

Governments around Australia have valiantly attempted to pick up the slack from the fall in household and government spending. “We anticipate a nearly 7% rise in public spending in real terms in 2008 as the central Government deploys the federal budget surplus,” Walters says.

As well as direct handouts and tax breaks for individuals, governments around the nation are set to launch aggressive infrastructure spending plans to stimulate activity and create jobs. But that won’t necessarily be easy, as Stephen Halmarick, managing director of economic and market analysis at Citi Australia, points out. “The challenge will be to have the projects up and running as soon as possible – this won’t be easy – (and) ensure the projects are ‘worthwhile’.” Another challenge for state governments will be getting funding for projects given the tight credit markets.

5. Interest rates

The big question with interest rates is; how low can they go? The Reserve Bank of Australia cut rates hard over the final few months of 2008, taking the official cash rate from 7.25% to 4.25% between September and December.

Most economists are tipping the official cash rate will be cut to 3.5% by March 2009 (which implies cuts are likely in February and March) although it is clear that the official rate could fall further. “Given that the flow of economic data for the global economy continues to deteriorate, and our forecast of recession in Australia, we expect the Australian cash rate to be lowered to 3% by March 2009,” Citi’s Halmarick writes.

6. Housing market

The housing market should get some sort of boost from sharply lower interest rates and the stimulus created by the beefing up of the first home buyers’ grant. On top of this, it’s worth noting that Australia’s housing market remains clearly undersupplied, with Westpac’s Evans estimating the shortage has reached around 140,000 dwellings – almost a full year’s production.

“While Westpac’s forecast of a solid recovery in dwelling investment in 2009 may prove to be over optimistic, there seems little chance that the style of collapse in residential investment that we have seen in previous recessions will occur in 2009 or 2010.”

JP Morgan’s Walters is tipping a 2% rise in dwelling investment in 2009.

7. The Australian dollar

The rapid fall in the dollar has put huge pressure on Australian business, with a recent survey from Dun & Bradstreet revealing 70% of firms have been negatively affected by the dollar’s slide. Unfortunately, the Aussie dollar looks set to fall further as the RBA cuts rates. ANZ chief economist Saul Eslake expects the dollar to be trading at around US55c by the end of 2009. That could force many Australian companies to put their prices up even further in 2009.

8. Trade

While the dollar will help exporters, the onset of a global recession and lower demand for Australian commodities (particularly resources) will result in exports falling but not collapsing –Walters is tipping a 4% fall in export volumes. On the flip side, imports are likely to fall as a result of sagging consumer spending. Import prices are likely to rise due to the falling Australian dollar.

9. Inflation/deflation

The war on inflation appears to be well and truly won, with most economists predicting inflation will fall rapidly, hitting the RBA’s target band of 2% to 3% by the middle of 2009. In fact, AMP’s Oliver believes deflation may be more of a problem, as he explained in this SmartCompany article. If the global recession is particularly deep and prolonged, Oliver may just be right.

10. China

Many of the forecasts outlined above will depend on what happens to the global economy, and particularly the economy of China, Australia’s largest trading partner and second largest export destination. If China’s economy is to slow dramatically, Australia’s economic downturn could be far worse than first thought.

Then again, if China can rebound, Australia will be a key beneficiary. Su-Lin Ong, senior economist and fixed income strategist at RBC Capital Markets, expects the authorities will have little choice but to stimulate the economy and prevent a rise in Chinese unemployment and social unrest.

“The challenges are considerable, but China ultimately remains on a long run upward trend as it urbanises, industrialises, and lifts its living standards,” she says. “Resource-rich Australia remains a key beneficiary.”

China’s rapid growth propelled Australia’s economy to great heights in the last decade. Let’s hope there is some fire in the dragon yet.