Richard's 2010 Crystal Ball

Richard Katter
Economics, Strategy and Research

This time last year it was quite easy to take a view on the direction of our economy for 2009...well, the first half any way. Things were hardly rosy, to say the least. Twelve months later Australia has been the beneficiary of some very strategically applied stimulus, both from KRudd and the RBA. Australia has also benefited from its fundamental strengths; its massive mineral resources, its high population growth and its undersupply of housing.

Whilst the balance of the advanced economies of the world were in recession Australia only conceded one quarter of negative GDP growth for the year. The amount of people in Australia who were unemployed didn’t even reach 6% of the work force; whereas the US reached 9.7% and already our unemployment rate has started to decrease.

Public perception has been that the Government’s stimulus has plunged us into unprecedented levels of public debt. To put this into perspective I have compared our public debt levels and budget deficits (as a proportion of GDP, allowing us to compare apples with apples) with that of the UK and the US. Australia’s budget deficit as a proportion of GDP is 2.4%, whereas the US is three times that at 9.2% and the UK is more than twice that at 5.5%. Public debt as a percentage of GDP for Australia is 14.7% with the US and the UK recording 37.5% and 51.8% respectively. From this data it is quite clear that our debt levels are well below those of other developed countries.

Given the impact these stimuli have had on Australia’s economy it is quite clear that it was money well spent. The question to ask now is "where are we headed in 2010?"

Based on the fact that our unemployment rate has already started to decrease I am pretty confident that the RBA will raise rates at least another couple of times in the first half of this year. They will be very conscious of preventing our economy from returning to the capacity constrained condition it was in prior to the GFC.

Increased interest rates combined with the winding back of the first home owners grant boost is expected to see purchasing activity in the residential housing market decrease in the short term. What will remain is demand for housing and given the finance sector is still quite constrained development activity is yet to return, and as such supply is still restricted.

As a result of demand for housing remaining, but with purchasing activity slowing and development activity remaining subdued, rental demand is likely to increase; leading to an increase in rents and subsequently rental yields. This will likely attract investors back to the market, filling the void left by the first home owners.

The commercial property sector is likely to remain subdued for the first half of 2010 while vacancy rates tighten up and reduce the supply of stock on the market.

It is expected that growth in the economy generally will be subdued for the first half of 2010 as the economy returns to equilibrium once the impact of the fiscal and monetary stimulus is removed from the economy. A lot of commentators discuss the likely hood of a V, W or U shaped recovery. I am tipping a square root shaped recovery with an extended period of limited growth!

Things to watch in the first half of 2010 which will likely impact our economy moving forward are:

• China (obviously) - people are still trying to determine whether its growth post the GFC is real and sustainable;
• An ETS - I believe it is inevitable that we will eventually have an ETS. The question is - will it be an election issue and how will it impact you directly;
• Employment and inflation - the RBA are going to be very focused on controlling our growth and ensuring that it is sustainable in the long term. They will achieve this through increasing rates;
• Ken Henry and his tax reforms - given our aging population it is pretty inevitable that we will be paying more tax in the future and;
• The Qld Government doing something to address the extremely restrictive legislative environment in which our property development industry is expected to operate under.

All this aside I am sure if you asked most economists globally where they would like to have their money invested in 2010, they would say our sun burnt country and this is reflected in the strength of the Aussie dollar.

Good Luck for 2010.

Richard heads up THG's Economics, Strategy and Research team (ESR).  ESR gives our clients the opportunity to look at their projects beyond the bricks and mortar. It’s always been prudent to gain and apply detailed market intelligence prior to establising a project strategy, but it’s becomingly increasingly important.  Email Richard at richardk@thg.com.au to find out more.