Market Update July 2010

This year has seen a renewed sense of confidence come back into the market.  Amazingly, the economy is expected to return to normal conditions in 2011.  An astounding outcome when you consider the fate of some European nations.  The RBA will probably take a breather in July and August to assess the impact of the rate rises that commenced late last year.  It would not be surprising that the economy will have nominal growth for the rest of the year.  The rate rises have a lag impact and we should start to better understand the effects in July or August. 

There are some hurdles that business owners will need to negotiate over the next two years, not least of which will be the RBA bias towards an uptrend of future interest rates.

Some key areas that could shape your performance in 2010 and 2011.

Economic growth

• long-term average economic growth rate of between 3% and 4% in 2010.
• the uncertainty surrounding Europe and the United States will impact our economy, however, we are more intricately linked with Asia and we should be spared any expected bumps.
• sovereign debt of other nations is a potential risk to the world economy.  How the governments manage this public debt remains to be seen.

Interest rates

• most economists are expecting at least one more rate rise in the second half of 2010 before the RBA considers that the cash rate is back to more normal long term levels.
• interestingly, the major banks are now discounting their fixed term rates suggesting that we are nearing the end of the rate rise cycle.
• it would be prudent to budget for an additional 1% - 1.3% in your cashflow budget for 2011.
• we believe that the banks will make a move before the RBA.
• banks are finding it difficult raising funds in the wholesale markets exacerbating funding needs for the Australian market.

Inflation

• inflation is expected to moderate to around 3%

Australian dollar

• more stability for the rest of the year.
• economists expect the Australian dollar to settle above US90c for the bulk of the year.

Employment

• our determination to resist cutting jobs and using strategies such as forced holidays and part-time to work to manage labour costs helped the economy avoid a recession.
• our prediction of an unemployment rate peaking at 6% was well founded.  Expect the unemployment is expected to trend down and flatline around 5.5%.

Business investment

• business investment will remain flat and this is causing some concern in the greater economy.
• sales and profitability continue to fall short of previous suggesting that business capital expenditure will still be flat for 2010.
• we expected the housing market to remain resilient and this has proven to be accurate.
• recent reports suggest a flat growth model for 2010 – 2012.
• recent slow down in residential lending will increase pressure on banks to provide more competitive rates that will assist first home buyers.
• population demands, supply shortages and the economic recovery will most likely push capital growth to double digit figures in 2012.
• the Australian dollar is putting strain on exporters.
• economists expect exports to increase by 2.5% in 2010.
• imports are expected to rise by around 10%.
• two major factors will be the US consumers continue to cut their spending habits and reduce their debt and whether or not the US policy makers aggressively start to increase the cash rate, even tiugh it is virtually zero.

China

• China's growth will be linked to accessibility of resources.
• Thus will mean further pressure on commodity prices.
• Westpac is predicting the world's powerhouse economy will continue with its strong growth, expanding at 9.4% during 2010.

Sharemarket

• rising rates and sustainability of earnings will make 2010 and 2011 a bumpy ride.
• even with improving economic growth, low inflation and relatively low interest rates there is still plenty of cash not being invested. 
• until investors move from a “cash security” basis, we can expect volatility.

Housing market

• we expected the housing market to remain resilient and this has proven to be accurate.
• recent reports suggest a flat growth model for 2010 – 2012.
• recent slow down in residential lending will increase pressure on banks to provide more competitive rates that will assist first home buyers.
• banks are finding it difficult raising funds in the wholesale markets exacerbating funding needs for the Australian market.
• population demands, supply shortages and the economic recovery will most likely push capital growth to double digit figures in 2012.

Trade

• the Australian dollar is putting strain on exporters.
• economists expect exports to increase by 2.5% in 2010.
• imports are expected to rise by around 10%.
• two major factors will be the US consumers continue to cut their spending habits and reduce their debt and whether or not the US policy makers aggressively start to increase the cash rate, even tiugh it is virtually zero.

Retail sales

• consumer confidence has bounced back but this is not reflected in the cash registers
• concerns about job security and the high level of debt are playing on the minds of consumers at leats until November 2010.
• foods and basic staples, cafes and restaurants (rebounding from last year) and household goods should benefit from an uptick in housing investment.
• Westpac believes that retailers should enjoy stronger performance.