International woes will affect Australia

The economic problems in Europe and the United States will affect Australia and the Asian region, making a return to surplus by 2012/13 harder, according to Treasurer Wayne Swan.

“There’s no doubt that recent events … impact on global growth, that flows through to domestic growth, that flows through to budget revenues, and that does have an impact,” he recently told Sky News.

“That means that objective that we’ve set, that determination to return to surplus in 2012/13 just gets harder because of these events, but there’s a very good reason for maintaining that determination.”

Mr Swan, who recently received his award from Euromoney magazine as Finance Minister of the Year in Washington has been in the US for meetings of the World Bank and International Monetary Fund with fellow finance ministers from the Group of 20 (G20) nations.

He said the troubles in Europe and the US could not be ignored by Australia, despite the underlying strength of the domestic economy and Asian region.

“We are all very interconnected, that’s why it’s very important there is a global response to the events in Europe,” he said.

“There’s no doubt that there’s far greater strength in our region … but the region isn’t immune from this event,” he added.

The IMF’s policy board, over the weekend, said it had agreed to act decisively and collectively “to restore confidence and financial stability, and rekindle global growth”.

The 27-nation European Union, the Fund’s largest shareholder, meanwhile pledged to “do whatever is necessary to resolve the euro-area sovereign debt crisis and ensure the financial stability of the euro-area as a whole and its member states”.

My thoughts:

The equity markets around the world are in turmoil. Some countries are in recession and others are likely to default on their debts.  Fear rules.

While Australia seems, and is, a long way from these problems, confidence here is low in the fear that we’ll be dragged down by these overseas problems. Our share markets have tumbled and our property markets are flat.

And it should come as no surprise that things are unlikely to get better for a while.

Things are likely to get worse economically, before they get better, which means are property markets are likely to remain flat for some time. Maybe until the end of next year.

The good news is that Australia is ready for almost anything the world economy throws at us. We’ve been battening down the hatches anticipating further financial problems.

As a country, we have low debt levels – the International Monetary Find estimates 24% of GDP this year as opposed to 100% in the US and 150% in Greece. And even though we have a small budget deficit, our Government could spend its way out of another economic crisis. Plus the RBA has the ability to lower interest rates to help stimulate our economy as it has done in the past.

At the same time the average household is in much better shape than a few years ago. We’re saving more than ever. On average we’re stashing away around 10.5% of our disposable (after tax) income, paying down mortgages faster than needed and paying off credit card debt.

While small retailers are battling, many of our larger companies are in a strong financial position, particularly our banks, who have bolstered their balance sheets. This means our major banks are no longer as dependent on overseas funds and could keep lending to us even if overseas interbank lending dries up.

I don’t see further major falls in our major capital city property markets, especially with a drop in interest rates on the horizon. But I don’t see a reason for strong increases in value either.

If you have a system, a great team of advisors, your finances organised and the right knowledge, now could be a great counter cyclical opportunity to buy good properties that will appreciate in value over the long term.

I guess you could call this the upside of a very challenging economic climate.


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