MLC Market Watch

By MLC Market Watch Team

25 Jun 2009

Ten reasons to be cautiously optimistic

The global economic crisis (GFC) has wreaked havoc with Australia’s economy. We’ve seen GDP fall, unemployment rise, investments decline and a sombre mood take hold in the market.

There’s no guarantee that the worst is over yet, however several indictors are suggesting the rate of decline may be slowing and our economy may be starting to fight back.

Looking at the financial news in Australia, the general tone is ‘cautiously optimistic’. Some experts are predicting we’ve seen the worst of this recession and that recovery is imminent or may have even commenced. Others are predicting a long slow recovery. Which outcome is correct will depend in part on how and when the rest of the developed world, (particularly the US) resolves their significant debt and imbalance issues.

Taking a “glass half full” perspective, we’ve highlighted ten reasons why Australia may be better placed than our global counterparts.

Gross Domestic Product has grown. Figures released by the Australian Bureau of Statistics (ABS) in early June revealed that GDP for the March quarter grew 0.4% from the previous three months, confounding common expectations of another decline following the November quarter drop. By technical definition, this means that Australia is not in a recession.

Unemployment is far less here than in other western countries. Unemployment stood at 5.7% in May. Compared to 9.4% in the US and 7.2% in the UK, Australia’s unemployment is relatively low and rising far less rapidly.¹

Interest rates are on hold. The Reserve Bank left the cash rate at 3% in June for the second month in a row. RBA Governor Glen Stevens argued that evidence of growing stability in the global economy and the stimulus measures by governments around the world “is helping to contain the downturn, and should support an eventual recovery”.

In the event further stimulus is required to bring Australia out of the downturn, the government and Reserve Bank have greater fiscal and monetary flexibility than the rest of the developed world.

Home sales and prices are still rising. ABS figures show that home sales rose 0.5% in April and building approvals jumped 5.1%. The current high demand for mortgages is another good sign. Low interest rates and the Government’s First Home Owners Grant seem to be having the desired effect.

Retail sales went up by 0.3% in April with consumers spending $19.35 billion according to the ABS. That follows a 2.2% increase in retail sales in March. These figures have also been assisted by the Government release of stimulus cash payments, which were aimed at encouraging people to spend and help stave off a recession.

Our banks are better regulated. We had very little sub prime lending in Australia compared to the US and this has placed Australian banks as some of the best capitalised in the world.

As of mid June 2009, the Australian sharemarket has rallied 30% off its low of 3111on 6th March 2009, with banking and resources sectors particularly strong.

Exports rose by 2.7% in the March quarter. Combined with a 7% fall in imports, Australia’s current account deficit narrowed to $4.6 billion from $6.5 billion in the fourth quarter of 2008.²

Much of this gain in exports is due to China’s spending. Chinese banks are spending their government stimulus loans on purchasing raw materials as opposed to US bonds. Happily, Australian copper and other metals are number one on China’s shopping list.

Compared to the US economy, which shrank by 2.5% in the year to March 2009, the Eurozone and Japan, whose GDP has fallen 9.7% over the past year, our economy is holding up relatively well.

However, it’s unwise to count your chickens in a global recession. Any number of factors could stall our economy again. With unemployment static for the time being and people still spending on goods and property we can be cautiously optimistic but must also remain realistic.

1 Australian Bureau of Statistics, Labour Force Australia, May 2009. www.abs.gov.au
US Bureau of Labor Statistics, Regional and State Unemployment, June 2009. www.bls.gov
Office for National Statistics, www.statistics.co.uk

2 Australian Bureau of Statistics, Balance of Payments and International Investment Position, March 2008. www.abs.gov.au