Economic Insights - two leading economists share their views
The Australian economy is likely to remain in recession for much of this year with the global slump yet to really impact. Global conditions are also likely to remain poor this year, with the global economy contracting.
This should lead to falling inflation and further monetary easing in most countries, including Australia, which along with fiscal stimulus, will aid recovery later this year and/or through 2010. Shares have rallied in recent times with increasing evidence that worldwide monetary and fiscal easing is gaining traction and that the severity of the pace of decline in global activity is easing, which may be the first step on the path to an eventual recovery from later this year and through 2010.
But with economic news likely to remain poor over the next six months, further profit downgrades are likely, meaning it is too early to say for sure that we have seen the bottom for this bear market.
The Australian share market is likely to remain volatile over the next few months. However, shares should improve on a 12-month view. Valuations are attractive and interest rates are low, and shares are likely to anticipate better economic conditions in 2010. Reflecting a much higher divided yield and reasonable growth prospects on the back of policy stimulus, medium-term returns of around 12% per annum are now possible.
Turmoil may continue in the international share market over the next six to twelve months on uncertainty regarding the depth and duration of the global recession. However, global shares are likely to provide reasonable returns on a 12-month plus view, given the likelihood of better economic conditions in 2010 and attractive valuations. Looking further out over the next five to ten years, improved dividend yields following the share slump and profit growth around nominal GDP growth will see medium-term returns from mainstream global shares of around 9% per annum on average.
In particular, listed property securities have probably seen the worst. Although further volatility is expected to remain over the next few months due to worries about gearing levels, capital raisings and the underlying property outlook, they represent very good value from a long-term perspective.
Both locally and worldwide, government bond yields may fall further in the short term on the back of the global downturn as it becomes apparent that short-term interest rates will stay low for a lengthy period. Global excess capacity continues to build, inflation falls further and central banks are buying increasing amounts of government bonds, all of which offset worries about an increase in the supply of bonds and rising sovereign risk. Longer term, bonds offer poor returns as yields are so low.
Dr. Shane Oliver is the Head of Investment
Strategy and Chief Economist for AMP Capital
Investors..
The world is currently experiencing
what the International Monetary Fund (IMF) calls the “great recession”,
with the global economy expected to contract in 2009,
the worst
performance in over 60 years.
This is obviously a very difficult environment for markets as they deal with the combined effects of a significant break-down in the world’s financial system and the dire economic circumstances. The other defining feature of the economic environment is, however, the unprecedented nature of the policy response. After the significant market failures in late 2008 and the shift downwards in economic activity that flowed from this, the leaders of the world’s major economies have engaged in massive stimulus and stabilisation policies.
Interest rates have been slashed around the world, while in those countries where interest rates have reached zero (including the US, Japan and the UK), authorities are undertaking what is called “quantitative easing” (lowering longer term interest rates and providing the banking system with extra cash to lend to the economy). In addition, there has been significant easing of fiscal policy, with tax cuts and government spending leading to a sharp increase in budget deficits around the globe.
Of course, there has also been extraordinary efforts to stabilise the global banking system, through direct capital injections, nationalisation and various government polices to provide the banking system with all the money they need in an effort to rebuild confidence in the system.
As a small economy with large trade links to the rest of the world, it would have been impossible for Australia to escape the effects of the global recession. While both the Reserve Bank (by cutting interest rates from 7.25% to 3.00%) and the government (via increased spending, tax cuts and stabilising the banking system) have put in place a significant policy response it seems clear that the Australian economy will also experience a recession this year (the first in 18 years).
Like most other countries around the world, in Australia the recession and financial crisis have led to a sharp fall in sharemarkets, falls in commodity prices and property valuations, an increase in the cost of borrowing for companies and a fall in official interest rates.
The good news is, however, that a significant amount of bad news has already been priced into markets. There have also been recent, very tentative, signs of some stabilisation in global economic data and the strong co-ordinated policy stance from the world’s leaders has seen some markets recover.
While it is early days yet and the fear remains that there is more bad economic news ahead of us, especially with regard to the unemployment rate, markets are beginning to look forward to the recovery. Caution is still needed and markets are likely to remain volatile, but there is now some evidence that the unprecedented policy response from the world’s major economies, and Australia, could be taking hold.
Stephen Halmarick
Head of Investment Markets Research
Colonial First State Global Asset Management
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As at 10 June, 2009 |
