Recovery will be a long grind as households feel the pinch: Access Economics

The Australian economy is recovering from the global financial crisis but businesses and financial institutions are under significant pressure, and any improvements in the country’s finances will be slower than previous recessions, new data from a prominent forecaster reveals.

The new Access Economics report comes as figures from the International Monetary Fund reveal the Australian economy is predicted to grow by 2.5% in 2010, up from the fund’s initial prediction of just 2% growth.

The new Access Economics Business Outlook report for December 2009 reveals a double-dip recession is unlikely and a solid recovery is underway, but many aspects of the economy are under pressure.

“Banks took a lot of damage through the crisis (making it hard for them to finance the
recovery), governments are under a lot of pressure to wind back stimulus, central banks are under even more pressure to begin to exit their emergency measures and super cheap interest rates, and families are under pressure to start to save more than they have been, believe it or not,” Access economist Chris Richardson says.

“So the euphoria of initial recovery may give way through 2010 to the recognition that a long grind has begun. The globe may already be recovering, but it isn’t about to experience the usual Lazarus-like recoveries seen in the wake of recessions past.”

Major factors affecting the country’s economy include the withdrawal of stimulus, which Richardson says will impact the overall recovery.

“There will be negatives: government spending will ease back, and consumers may stay in low gear as rates rise, but housing construction will lift notably thanks to surging population gains, while stock holdings will be rebuilt as company confidence lifts.”

“Beware the overconfidence that many are now feeling: Australia’s successfully small downturn means that, by the standards of history, a small recovery awaits.”

Other major factors include underlying inflation, with the rising Australian dollar having a limited impact on rising prices. Pressures on rents and health and electricity costs will grow, while interest rates are expected to rise to over 5% by the first half of 2011 – which Richardson says is bad news for business borrowers.

Additionally, the doubling of the account deficit over the past six months has put pressure on the economy.

Richardson said the economies of Western Australia and Queensland were impacted harshly during the financial crisis, where the mining sector was one of the main victims, but state growth should increase.

In New South Wales, retail and housing construction has begun to improve, but Richardson says the rising Australian dollar and higher interest rates could hold the state’s recovery back. In Victoria, he labelled the state’s biggest risk as the manufacturing industry.

South Australia’s economy has been impacted by the automobile and wine industries, but Richardson says both markets are improving. Additionally, recovery in the Northern Territory is dependent on resource developments, while ACT expansion may be dampened by “the need for Federal fiscal restraint”.

However, Richardson noted a recovery in many sectors including telecommunications and business services, which includes accountants and lawyers.

Mining will also see a better year in 2010, with output rising rather than falling and with the potential for the first half of the coming decade to provide the sector with a series of bumper vintages. And Australia’s manufacturers may see the sharpest turnaround of all.

Additionally, the finance and retail sectors are expected to see a recovery, with construction also expected to see good times due to housing plans.

“In contrast, the public sector – which was pumped up in 2009 to help cushion the downturn – may grow at a more normal pace in 2010 and 2011 as the need for stimulus fades and as the States and the Feds begin the much needed repair of their budgets.”

But there was also some good news for Australia, with the jobs market beginning to recover. And while rising migrant numbers may keep the unemployment rate slightly higher, the job market has most definitely begun a recovery.

“With sharemarkets stronger, boomers will go back to retiring in larger numbers, opening the way for younger workers to do better in job markets then they did in 2009.”

The report comes as the IMF predicted the Australian economy will grow by 2.5% during 2010, according to its World Economic Outlook report.

Additionally, the fund said the country’s growth would reach 3% during 2011, with global expansion of 3.9% in 2010 and 4.3% in 2011.
“The global recovery is off to a stronger start than anticipated earlier but is proceeding at different speeds in the various regions,” the IMF said.