Outlook for 2008
2008 could be one of those years when emotion overrules reason as the most powerful influence on the economy. The crisis in confidence owes its origins to the sub-prime crisis in the US. The resulting housing slump and lower consumer confidence sparked fears of a US recession, with many people worrying that this could spread beyond US shores. As we saw, it certainly caused turmoil on world share markets.
Negative sentiment has the ability to feed off itself. If consumers pull back on their spending, recession could come about more as a self-fulfilling prophecy rather than as a result of any economic fundamentals.
But what are the fundamentals telling us about the economy?
In Australia, it is doing very well. So well, in fact, that inflation is the great concern. Whilst economists are divided, with underlying inflation running at 3.6% there will be no great surprise if the Reserve Bank raises interest rates again later this year.
This leaves us with three prevailing themes for the year –
- fear of US recession with possible global consequences,
- fundamental strength in Australia and increasing pressure on local interest rates, and
- jitters on world share markets.
Whilst the US may be in recession, it is likely to be short and shallow. The cut in US interest rates of 0.75% on March 18th following similar rate cuts in January demonstrates that the US Federal Reserve will act aggressively to try to avoid a prolonged downturn. Lower interest costs will support both corporate profits and consumer sentiment. Other central banks have also shown their willingness to act to limit the current credit crisis and avoid recession.
A US recession is not expected to have a significant impact in Australia, as we are now more closely coupled to the emerging Asian economies, particularly China.
Craig James, Chief Economist at Commsec, describes the Australian economy as being “in the best possible shape to weather the current share market storm.”
Shane Oliver at AMP also sees Australia’s growth being supported by the shortage of housing and a wide range of infrastructure and mining projects. These will help to maintain low unemployment levels and lift consumer confidence. This will be underpinned by relatively strong growth in Asia.
What does all this mean for Australia?
That bodes well for Australia as a whole. However, people who are carrying high levels of debt and with little spare cashflow will be hurt by any increase in local interest rates. Share investors are also likely to face further uncertainty for several months. That said, shares are now looking cheap, and may offer some good buying during the first half of the year.
Sources: Commsec, AMP, ABN AMRO