If you are an investor and you have not contemplated an economic slump in Australia during the next few years then in my view, you might be in for a nasty surprise. Yes the Australian economy did hold up well during the worst of global financial crisis, but the crisis isn’t over yet and it still has some sting left in it’s tail. (just ask the people of Greece!)
So what exactly do I have in mind? Well please allow me to present a fictional scenario on this blog and as you read it, just ask yourself how confident are you that what I am outlining could not happen.
Would you be surprised if anything I mention below happens? Or perhaps there are some issues raised below that we are simply sweeping under the carpet at the moment and if so, isn’t that just a little reckless?
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An Economic Slump in Australia in 2011 – A fictional (?) scenario
Dateline: Mid 2011
Today the Australian Treasurer announced that the plan to bring the budget back into surplus will be pushed back by 4 years as the economic slowdown in China starts to impact the Australian economy.
Analysts say that now that unemployment has crept above 6.5% the Government will have little choice but to look at measures to try and boost the economy again, even though this will mean having to borrow further in order to do so
The situation has been made worse by the Reserve Bank’s efforts to reign in inflation which resulted in interest rates peaking late last year, and these raises are one of the factors behind the current falls seen in home prices nationwide.
“The surge upwards in commodities prices is over” said one mining analyst based in Singapore. “The rules of supply and demand are kicking-in now and as China scales back it’s stimulus spending, many large mining companies are having to scale back output especially as prices fall.”
Indeed many people appeared not to have noticed the enormous amount of money used over the last decade to start new iron ore and coal mining projects. Some of these projects have resulted in extra supply capacity coming online just as demand is softening thus hitting prices for coal and iron ore hard.
To make matters worse the opposite has been happening in the oil sector where many project were shelved as a result the global financial crisis in 2008/2009. As the global economy continues to recover, oil demand is increasing but the underinvestment in new projects over the last few years means that supply is struggling to meet demand.
Oil prices are now near $100 USD a barrel and analysts expect them to reach $120 by the end of the year. Higher oil prices have been a major factor in pushing up prices for a whole range of goods and services from airfares to the cost of bananas at the supermarket.
Another major challenge for policy makers in Australia is that gap between imports and exports still remains wide. The years of current account surpluses have not arrived and this is likely to put pressure on all levels of government to increase taxes in order to make up for the lower than expected income from mining royalties and corporate taxes.
“It’s a catch-22 situation that the Government, RBA and Treasury never thought was possible” commented an economist, “as unemployment rises immigration levels will need to be adjusted downwards, but as this happens this will adversely impact the growth of the domestic economy”
He went on to add: “sadly too much time and effort was put into working out how to spend the proceeds of a decades long economic boom and very little towards working out how to deal with anything else. Australia not only counted it’s chickens before they hatched, they also started counting the eggs before they were even laid”.
Australian GDP is expected to contract by 0.8% in the 3rd quarter but most economists fear the 4th quarter will be even worse and are tipping a contraction of 1.3% as the pullback in house prices has more of an impact.
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I know many people will read what I have written above and consider it highly unlikely that any of what I outlined will occur in the next few years. But then again, is it really likely that none of the developments contained in the above scenario will turn out to be true?
Is the Australian economy really going to enjoy a magical era where:
- House prices keep rising.
- Incomes keep rising.
- Inflation remains under control.
- Iron ore and coal prices continue to rise.
- The population continues to grow at records levels but the economy is able to keep creating jobs in order to keep unemployment low.
- Taxes are not raised.
- Government spending is kept in check.
- The Chinese economy continues to grow strongly.
Imagine what would happen if one of the above does not turn out to be true? How would for example, high inflation affect the economy? Would the RBA be forced to raise interest rates higher than the historical average to try and keep inflation under control and if so, what would happen to house prices?
If house prices began to fall isn’t that likely to have some knock-on impact on another area of the economy? What would happen if something else does not fall into place according to Ken Henry’s rosy vision of the future? How truly robust is the Australian economy?
I accept I might be a little too pessimistic. But isn’t it also possible that many economists, analysts, politicians and bureaucrats are naively too optimistic? Isn’t there a real danger were at witnessing economic “Groupthink” in action? Where are the voices of caution or dissent?
I am happy as always to have my logic questioned and I also encourage readers to post their scenarios or thoughts regarding how the Australian economy will be tracking next year and beyond.
The mainstream media may not be raising concerns about the economy in the years ahead, but at least we can consider that possibility here on this blog!
Search terms: whats the economy like in australia, what is the australian economy like, what is the market looking like australia, global ecenomic slump for australians, australian economy optimistic or pessimistic, australian economic scenarioRelated posts:
- Economic indicators, the Australian economy and the stock market
- The Australian economy, house prices and economic outlook
- Another G20 love-in, the global recovery and China.
- The two speed economy, debt and the fantasyland federal budget.
- Swan’s lazy 2011 budget and Australian economic madness
135 responses so far ↓
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101 Ned S // May 21, 2010 at 2:19 pm
“the game will continuously change” -- Thanks Anon. It’s interesting to watch it played though. Even though the parameters vary.
102 Greg Atkinson // May 21, 2010 at 3:32 pm
Parameters? Are there parameters?
103 Ned S // May 21, 2010 at 4:06 pm
I got the impression that Anon felt some people might think so Greg?
104 Anon // May 21, 2010 at 4:21 pm
lol perhaps there are no parameters!
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
105 Anon // May 21, 2010 at 4:27 pm
Heres some rules by Stuart Walton (10 yr record 100% annualized p.a.) I found useful:
“Fundamental, technical, macroeconomic and sentiment analysis provide a valuable inter-related set of screening criteria that we aggregate when making buy and sell decisions.
*
Businesses can face extended periods of time where company specific news has no bearing on their stock prices; at other times, stock prices can make exaggerated moves in response to fundamental news or events.
*
Stocks can move through cycles where macroeconomic trends stay benign or irrelevant to price moves, and at other times stage wild swings in response to the minutia of government released economic data.
*
Changes in investor sentiment can create a market environment where good news is considered bad or bad news is considered good.
*
Stock prices can occasionally respond perfectly to historical technical patterns or sometimes not at all.
None of these factors can be analyzed effectively in isolation or even in equal weight. Each new market cycle requires an adaptive response to how these elements are interacting to influence stock prices and future market trends.”
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
106 Ned S // May 21, 2010 at 4:46 pm
Paramaters have got something to do with algorithms I gather -- You remember Algy -- The bloke who met a bear? And the bear ended up bulgy -- With Algy?
Must admit, I don’t see especially happy times for the West over the next decade as we iron out our welfare expectation issues, and get to pay lots more tax. And looking at the way the big investment banks and hedge funds make their money, it seems pretty unlikely they won’t come hunting whatever the government should happen to leave us. So highly liquid places sound like a dodgy place to have it if one enjoys a snooze occasionally.
Those criteria tell me that stock markets have indentical behaviour patterns to my ex-wife -- I avoid her too!!!
107 Greg Atkinson // May 21, 2010 at 5:31 pm
Anon, I am not a big fan of “annualized” returns as being a measure of anything really.
Anyway in Plain English isn’t Walton just saying that economic and business conditions change, so be ready to adapt?
108 Anon // May 21, 2010 at 5:56 pm
“Anyway in Plain English isn’t Walton just saying that economic and business conditions change, so be ready to adapt?”
Yeah pretty much.
Hey I got the annualized return part wrong…it was actually compounded:
“To tick off just a few batting averages, by the time Schwager put his manuscript to bed, Stuart Walton had realized a 115% gross average annual compounded return in the 1990s (92% to his clients after deducting fees).”
You can’t tear apart his record now Greg!
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
109 Ned S // May 21, 2010 at 9:09 pm
FTSE is still taking a whack (as is the DAX); And the DJIA futures are commiserating. Gold is sitting there saying I’m good -- And I dare you to tell me different -- Geez, even Jim Cramer agrees!
110 Anon // May 21, 2010 at 9:16 pm
If we go down more i’m going to keep buying.
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
111 Anon // May 21, 2010 at 9:17 pm
Get ready to short the VIX.
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
112 Ned S // May 21, 2010 at 9:23 pm
I’ll come back and ask Greg as the controller of the house; This just all seems so highly speculative and manipulated, I can’t see any value anywhere -- Unless one values speculation and manipulation -- As the Brits and the Yanks seem to as it’s how they make a buck these days -- As opposed to working for it -- Or selling their national resources?
113 Ned S // May 21, 2010 at 9:24 pm
“If we go down more i’m going to keep buying” -- Falling knife???
114 Anon // May 21, 2010 at 9:26 pm
Value is there, but you’ve gotta unload them before the stimulus wears off…or the value will turn into a value trap.
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
115 Anon // May 21, 2010 at 9:27 pm
“If we go down more i’m going to keep buying” – Falling knife???
True Ned…but you know me…if my intuition is strong I will go at it hard or not at all! But i’ll hedge my downside risk of course if everything starts falling thru the floor!
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
116 Anon // May 21, 2010 at 9:30 pm
We dont want 1070 to breach (not intraday) at the close of trade on the SPX (SnP 500). If it does no doubt I will keep buying whilst everyone keeps selling.
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
117 Ned S // May 21, 2010 at 9:39 pm
“i’ll hedge my downside risk” -- Thought you would.
And must admit it isn’t seeming that cataclysmic to me right now???
118 Anon // May 21, 2010 at 9:44 pm
4 levels of support below ~9,800 on the DJIA…i very much doubt it will break all those…and they are close together.
The slope of this drop is looking like its on its last legs ! Maybe 200+ points FALL on DJIA…followed by a big snap back bargain hunting rally to only be slightly down?
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
119 Anon // May 21, 2010 at 9:46 pm
And must admit it isn’t seeming that cataclysmic to me right now???
Nope, not at all! (well at least at the moment)
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
120 Anon // May 21, 2010 at 11:00 pm
alot of buying when we had that big flash down. I didn’t even get a chance to buy! Maybe rally here or small rally and another downleg. Keeping some gun powder ready
None of my posts constitute financial advice – so do not act on it in that manner. Its just chit chat. Always see a financial advisor for decision making / advice / info.
121 Greg Atkinson // May 22, 2010 at 8:26 am
Ned I am sort of just sitting back and watching the show unfold. I am more of a big themes guy rather than a stock picker, so when a correction likes this strikes I try and see if my view of the world economy is holding up okay.
Generally speaking I reckon Europe will drag itself out of this mess, slowly. They are just going to be a little more tough on themselves and stop having long summer holidays and retiring on generous pensions.
I am bullish on Asia as you know but think the Chinese economic miracle will fizzle out. The days of rampant growth always come to an end. (It’s like having a winning streak in Vegas)
I believe the US has entered a period of long term decline. The US economy will pick up again, but I don’t think we will see the US being quite as strong as it was ever again.
122 Anon // Jun 3, 2010 at 10:12 pm
I’m raising my long term investment targets on the DJIA..i’m seeing very bullish patterns occuring. Investors Intelligence is not bearish enough, but this tends to only work at extremes -- this indicator is useless here imo.
EOY targets for DJIA raised to 11,500-12,000.
So many people are on the absolute wrong side of this (being bearish). And my timing is generally pretty good, so be warned -- severe under-performance comming if you sit this out
.
Sept-Nov correction may occur but will not be very deep imo (higher recent lows at worst).
This is not advice (nor are any of my posts)! Always seek a financial adviser to tailor advice to your particular circumstances!
123 Ned S // Jun 3, 2010 at 10:43 pm
As a boring old Oz property investor Anon, I’ll just be glad to see the Djia get back up to 12,500 maybe? -- In the hope that the the masters of the universe may back off a bit on feeling the need to knick loot from all and sundry to recoup their losses perhaps -- They are the most loathsome of scumbuckets!
124 Anon // Jun 3, 2010 at 10:55 pm
“As a boring old Oz property investor Anon, I’ll just be glad to see the Djia get back up to 12,500 maybe? – In the hope that the the masters of the universe may back off a bit on feeling the need to knick loot from all and sundry to recoup their losses perhaps – They are the most loathsome of scumbuckets!”
Well Ned being boring isn’t so bad -- you didn’t lose anything during the Great Crash! And i’m guessing if property tanks thru the floor, you will have all your bullets ready to pick up gems that rarely hit the market?
As for the DJIA -- 12,500 maybe who knows? But its inevitable this government debt situation will continue to evolve with it probably ending with a US debt disaster. Buffet has recently said Municipal debt could be an issue in a couple of years. So 2011-2012 imo will become the bear market to watchout for. However what we just experienced in 2008 is a statistical anomaly, so to bet on this happening again is basically gambling (excludes oz banks/housing of course).
This is not advice (nor are any of my posts)! Always seek a financial adviser to tailor advice to your particular circumstances!
125 Ned S // Jun 4, 2010 at 12:05 am
“didn’t lose anything during the Great Crash” -- There might have been a few who didn’t lose anything Anon, but they were pretty few and far between I think? Sure, I’ve kept my capital basically intact to date, and on paper (in theory?) even picked up 10% maybe? But I’d be kidding myself if I pretended that the RBA dropping rates from 7% to 3% (or somesuch?) didn’t severely damage my debtfree cashflow! Doubt there’s many of us who’ve been really killing the pig lately?
126 Biker // Jun 25, 2010 at 3:03 pm
I’d missed this blog.
On balance, we made quite a lot of money. Yes, we found we’d paid too much for one block, subsequently bought two very cheaply; won _real_ money playing Super games; and scored _bigtime_ with low interest rates. The latter enabled us to provide each tenant family with up to $14K worth of extras to reduce their costs and increase their comfort.
Good to read about your wins, Ned!
127 Greg Atkinson // Aug 14, 2010 at 9:20 am
I have noticed of late some finance journalists and commentators are daring to talk about a possible economic slowdown in Australia. What we know now is housing finance has slowed, retail sales numbers are soft and just the other day unemployment crept up a touch. Could Australia’s economic dream run be coming to an end?
128 Greg Atkinson // Dec 1, 2010 at 9:39 am
Weaker than expected Australian GDP numbers out today. Maybe things are moving towards my Mid 2011 scenario above?
129 Senator13 // May 16, 2011 at 5:27 pm
I found this was a very eye opening article:
Australia shuts up shop: the effect the GFC has had on your local stores
Read more: http://www.news.com.au/business/business-smarts/australia-shuts-up-shop-malcolm-farr-on-the-effect-the-gfc-has-had-on-your-local-stores/story-e6frfm9r-1226056709832#ixzz1MUes5tei
130 Greg Atkinson // Jun 26, 2011 at 10:33 am
Senator I think small business owners feel what the stock market has been telling us for a year or more and that is that the economy is struggling. Even the mainstream media are now starting to pump out articles about how the Australian economy (ex mining) is facing strong headwinds so if they have woken up then things must be getting bad
131 Grant Musgrove // Jul 27, 2011 at 12:52 pm
todays inflation numbers confirm we have a inflation problem
132 Greg Atkinson // Jul 29, 2011 at 1:04 pm
Indeed we have Grant. An inflation problem while at the same time the economy outside the mining sector is struggling. It therefore amazes me how the RBA or Government can claim they are doing a good job managing the economy.
It also looks like property prices are sliding backwards now so if commodities prices start falling then the GDP numbers are going to look quite bad later this year or in 2012.
133 npi_tweet // Sep 26, 2011 at 2:33 pm
I think your scenario is highly probable, I believe that higher inflation will be the prelude to problems to come.
I would say if the world economy comes off the boil in the short term inflation in Australia may start to rise, mainly due to domestic industrial relations policy, and lower commodity prices excluding oil (AUD starts to decline).
Either a falling dollar or domestic inflation, will translate to higher interest rates, which consumers and the media are screaming about a 0.25% rise…imagine 1% -- 2%. Our big 4 banks may be forced in passing on higher rates irrespective of the RBA movement due to the higher cost of lending from overseas.
Once this happens we will start to go in reverse. Consumers will stop spending (more so than now), house prices decline further and the RBA is now forced to drop rates dramatically where they will stay for several years while Australians try to reduce the private debt that they have accumulated over the past 20 years. Dropping rates will also make the AUD cheaper and exacerbate the problem.
Australia really needs structural reforms NOW to survive the next 20 years, because relying solely on mining and monetary policy is a fools paradise. We will officially be a Banana Republic!
The govt deficits are about to get larger after next year.
134 Biker // Sep 26, 2011 at 11:36 pm
npi: “..will translate to higher interest rates, which consumers and the media are screaming about a 0.25% rise…”
First I’ve heard of this. Can you provide links, npi?
135 Greg Atkinson // Sep 30, 2011 at 3:47 pm
Well Wayne Swan is finally preparing to announce his target date to balance the budget will slip. According to a report in The Australian today:
Mr Swan said the government remained “determined” to deliver on its 2012-13 return-to-surplus commitment, but suggested overseas events could force the government to reassess the timetable.
Looks like even the Government will be unable to balance the books even after they raid the future fund.
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