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The fears about or economy may be exaggerated

Don Stammer is one economist I have been following for years and I respect his analysis.

In his regular column in The Australian he says: If asked to summarise in 50 words or less what’s going on in the economy and investment markets, I’d respond in the following way.

The world economy has rebounded better than was expected two years ago, but it’s a two-paced upswing; concerns about a double-dip recession in the global economy, though understandable, seem overdone; and sharemarkets are now gloomier, and interest rates on government bonds lower, than the fundamentals would suggest.

In its recent Statement on Monetary Policy, the Reserve Bank of Australia seems to offer a similar assessment of the economic fundamentals, though of course the bank is circumspect when commenting on investment markets.

The RBA notes that the rate of recovery in the global economy, though moderating recently, has exceeded earlier expectations and expects “global growth to be around trend [about 4 per cent] over the coming year, although uncertainty about the outlook remains elevated”.

Australia’s financial system “remains in sound shape and loan losses appear to have peaked”. Bank credit to business is no longer contracting and listed companies have stronger balances sheets following last year’s equity raisings, but “small businesses report that lending conditions remain tight”. Led by exports and business capital spending, the Australian economy is forecast to grow by 3.25 per cent this year and by 3.75 per cent to 4 per cent next year and in 2012.

The risks on the negative side are that the pick-up in private sector spending “does not occur as quickly as expected at a time when public investment is contracting”, the Chinese economy slows more than expected, or there’s a “significant retreat from risk-taking” internationally.

On the upside, private spending could exceed expectations, given strong commodity prices and low unemployment and/or global growth could continue to grow at an above-trend rate.

The RBA forecasts underlying inflation to remain within its target band of 2 per cent to 3 per cent over the next two years, though at times headline inflation is likely to exceed 3 per cent because of the large increases in utility prices.

The moderation in house prices is called a welcome development and attributed in part to the “return of interest rates to around average levels”.

While the RBA highlights the key worries and uncertainties in the global economic and financial outlook, the content and tone of its assessment would be seen as broadly positive.

Yet shares — here and in the US — have recently been trading on an average price-earnings multiple of less than 12 times the profits forecast over the next 12 months (the long-run average is about 14 times).
And in many countries, too, interest rates on government bonds are at levels appropriate for a drawn out global slump with little or no inflation. There’s a reasonable case that gloom in investment markets has run too far.

This is a summary of a great article you can read in The Australian.



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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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