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Australian economy reveals split personality

The good, the bad and the great unknown. It seems experts are divided when it comes to the future of Australia’s economy, with a mixed outlook on the horizon as the new financial year ticks over.

There’s the ongoing strength of our dollar on the global stage, record low unemployment and the mining boom on the one hand, and increasing consumer caution that’s causing weakness in various sectors such as retail and tourism on the other. Add interest rate uncertainty into the mix and it’s understandable that many economists are scratching their heads with growing perplexity.

According to an article in The Australian, it was only a year or so ago that our dollar was sitting at around US85c, with a handful of bullish economists suggesting it would reach parity. Now of course, it’s trounced the US Greenback and shows no signs of weakening any time soon.

While this might seem like a windfall for some companies who can afford to seek out offshore opportunities, it is causing issues for others, with a report from Deutsche Bank indicating that company earnings are falling.

It says that in the past two months, earnings forecasts have been downgraded for 119 big companies – mainly industrial based businesses where earnings growth has flatlined for the past four years, with only 56 presenting a positive outlook (primarily in the resources and banking sector which are largely immune to currency swings).

Although politicians insist we have one of the most enviable economies in the world, some suggest our future remains shrouded in uncertainty. In comparison, the beleaguered US economy is slowly regaining strength, while the European economic outlook remains bleak and Asia faces a looming inflation problem.

While the resources boom is underpinning much of our current wealth, it has essentially created a two-tiered economy. The central bank has made no bones about the fact that they will continue to push the interest rate button should inflation threaten to speed out of control as the mining sector continues to prosper, which is causing consumers to become a lot more cautious and pull back their spending.

As we start to save more than we have in almost three decades, retailers are feeling the pinch and even Myer has seen its share prices slide dramatically of late.

With predictions of further interest rate rises from the Reserve Bank, most economists are warning that the divide between the resources and non-resources sectors is only going to widen in coming months and there’s increasing concern over mortgage arrears, which are also on the rise.

Even the RBA seems slightly confused as to which way the economy is likely to head in the immediate future, sending mixed messages about keeping a cap on inflation in one instance and then failing to take action the next, even though inflation is tipped to run at the top of their target range of 2 to 3 per cent for 18 months from December this year.

In its statement of monetary policy and speeches by governor Glenn Stevens, the RBA identifies the inflation problem and signals that rates will go higher. However the board minutes go soft on inflation, indicating that the members are not committed to raising rates.

This has created a divide among experts, with initial forecasts that a rate rise was impending being toned down to suggest a rise is no longer imminent.

Prominent retailer and RBA board member Roger Corbett has said Australia has a “bipolar economy” with patches of strength and weakness.

So what’s ahead? Who do we believe?

Some analysts suggest interest rates will drop, others (but fewer than before) are tipping a rate rise later in the year, which will have little impact on the booming resources sector, but will add to the pain for those already struggling – including home owners currently feeling the pressure of rising repayments.



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About

Michael is a director of Metropole Property Strategists who help their clients grow, protect and pass on their wealth through independent, unbiased property advice and advocacy. He's once again been voted Australia's leading property investment adviser and his opinions are regularly featured in the media. Visit Metropole.com.au


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