A happier, cautious New Year

As equity markets continue to go sideways for the rest of the year and business confidence still frets about the eurozone, our highly profitable banks will apply a rigid stress-test to their lending to homes and smart business borrowers.

Banks will now pass on their higher cost of funds acquisition as corporate treasurers note that their banks are steadily raising their risk penalties in a an environment of stalling credit growth.

APRA (the Australian Prudential Regulatory Authority) has advised our banks to check the impact of a worst-case scenario producing a fall in European GDP, a rise in public response to rising levels of unemployment and a potential collapse in property investment.

Ric Battellino, the RBA Deputy Governor warns that Australia’s indirect exposure to Europe through the effect on some of our important trading partners could be significant. The banks still discouraged by the arm-twisting interference with their interest rate autonomy are now rushing a new stress-test to respond to the impact of government’s rediscovery of fiscal discipline.

The cut backs in state and federal government spending that represents our own austerity package will reinforce a great divide between the big and small ends of town. Large companies have access to write-offs and retained earnings to carry them through to an exceedingly profitable 2012-3 financial year while SMEs are forced to stall on new hirings and cut another hole in the belt.

Olivier Blanchard, the IMF Chief Economist says he is surprised about the debate about the best way forward and warns against governments rushing into austerity measures and crushing of consumer confidence.

“The hope that fiscal consolidation will make people optimistic about the future and lead to a boom in the economy next year I think is something we should give up. It seems to me everybody should agree that the fiscal adjustment should be a long drawn out, credible, medium-term process,” says Blanchard.

The good news for Wayne Swann as the “world’s greatest treasurer” is that a fall in the price of gold, falling equity volatility and continuing central bank rate cuts will combine to generate a year of steady growth in both business and consumer confidence. Getting the budget back to a tiny surplus, introducing new pay as you go approaches to disability and dental insurance and introducing the carbon tax reflation of lower income households relies upon this medium-term strategy.

Gary Morgan reports that Roy Morgan Consumer Confidence rose for the second straight week to 113.4 (up 2.2 points) last weekend after the RBA cut interest rates 0.25% to 4% and European Leaders announced their latest resolution to the European sovereign debt crisis last Friday.

“The rise in Consumer Confidence was driven by increasing confidence in the Australian economy over the next five years with 38% (up 5%) of Australians expecting “good times” and over the next 12 months with 31% (up 2%) expecting “good times”.

However, despite the good news late last week, worries have returned this week about whether the European crisis has really been fixed and the All Ordinaries has fallen 3% this week while the Australian Dollar has again fallen below parity with the US Dollar.

Smart companies will continue to plan for steady growth in premium product sales and strategic business developments for the longer-term, while concentrating on customers who are looking for a little luxury, quality experiences and a very merry Christmas. Have a happier, cautious but more prosperous New Year.

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. Colin is also a member of the global Association of Professional Futurists.