10 key economy forecasts for 2010

Australian entrepreneurs enter 2010 with a renewed sense of confidence. After an extraordinarily rocky 2009, Australia’s economy is expected to return to more normal conditions, with growth gathering speed as the year goes on.

But there are some hurdles that business owners will need to negotiate, not least of which is rising interest rates.

Here are the 10 key areas that could shape your company’s performance in 2010.

Economic growth

Most economists are tipping a return to Australia’s long-term average economic growth rate of between 3% and 4% in 2010 – a bright outlook considering we’re emerging from a year when it seems a recession was a near certainty.

In the end, 2009 wasn’t all that bad. While official data won’t be out for a few months, most economists have pegged last year’s growth rate at around 1% – not great, but certainly a lot better than most other developed economies.

In fact, if there is one main danger for the Australian economy, it’s the lingering weakness in the economies of Europe and the United States. However, this shouldn’t be enough to knock our miracle economy – going for its 19th straight year of growth – off course.

“While very real external risks remain apparent in 2010 due to continuing weaknesses in the global economy (and particularly due to the continuing skittishness of financial markets, as demonstrated most recently by the Dubai World scare), Australia is entering 2010 from a position of strength,” ANZ senior economist Alex Joiner says.

Interest rates

The downside of a recovering economy is rising interest rates. After slashing the cash rate by 4.25% to 3% in late 2008 and early 2009, the RBA has acted quickly to bring rates back towards what it calls a more “normal” setting. Consecutive 25-basis point rises in October, November and December have the cash rate sitting at 3.75%.

So how high will rates go in 2010? CommSec’s Craig James expects two more 25-basis-point moves earlier this year (probably starting in February) and two more in the second half; that would bring rates to 4.25% at mid-year and 4.75% by the end of the year.

Of course, we should look on the bright side – with inflation tipped to moderate to around 3%, real interest rates will remain very low by historical standards.

Australian dollar

After an extraordinary year in foreign exchange markets in 2009 – in which the dollar moved from a low of US62c in February to a high of US94c in mid-November – Australian businesses should enjoy a more stable year in 2010. According to economists, we can expect the Australian dollar to settle above US90c for the bulk of the year.

But how high could it get? ANZ economist Amber Rabinov is tipping last year’s peak of 94c will be broken by the middle of the year as the gap between rising Australian interest rates and lower rates overseas widens and commodity prices (specifically iron ore and coal) remain strong.

She’s tipping US94c by mid-year, while Craig James expects 98c and some other economists expect to see the dollar hit parity with the Greenback.

However, a strengthening US dollar in the second half of the year is likely to see the Australian dollar retreat; both James and Rabinov are tipping US90c by year end.

Employment

The attitude of Australian employers was a key reason we dodged recession last year – instead of cutting jobs, companies cut hours and used strategies such as forced holidays and part-time to work to manage labour costs.

Predictions of an unemployment rate as high as 8% in early 2010 have now been replaced by a peak of 5.8% in the second quarter of the year.

After that, the unemployment rate is expected to trend down, to remain steady (according to Westpac and ANZ) or even trend down to 5.25% (according to CommSec).

Whatever the exact number, the psychology is what is important here. Job security will be a fading issue for most consumers and skills shortages a looming problem for most entrepreneurs, particularly as the recovery gathers a bit of momentum.

Business investment

Sluggish business investment remains something of a concern – the latest survey from the Australian Chamber of Commerce and Industry suggested investment intentions are subdued, with 14% of companies planning to increase investment in 2010.

“Actual conditions, sales and profitability continued to fall short of prior expectations. Weak investment indicators also suggest that businesses remain pessimistic about their business capital expenditure plans in the first half of 2010,” the ACCI’s director of economics and industry policy, Greg Evans, said.

Westpac is forecasting an increase of 0.5% in business investment across 2010, but ANZ is more bullish with a forecast of 3.4%, with investment from mining-related sectors tipped to be especially strong.

Housing market

Double-digit house price growth warmed the hearts of even the most pessimistic householders in 2009, but the growth is expected to moderate in 2010, particularly as first home buyers depart the market.

Shane Oliver, chief economist with AMP Capital Investors, is tipping average house price gains of around 5%.

“Average house price gains are likely to slow as mortgage rates rise and the first home owners boost comes to an end. A stronger labour market will provide some support though.”

CommSec’s Craig James is more upbeat, tipping price growth of 8% to 10%, due mainly to a shortage of available housing.

“Population continues to grow and not enough homes are being built. For investors, rising rents and home prices is an attractive combination.”
Trade

Australia’s trade outlook is mixed. While things are looking up for our biggest exporters in the resources sector, with strengthening demand and prices, the high Australian dollar and relatively weak state of many big trading partners – think Japan, the US and Europe – isn’t helpful.

Both ANZ and Westpac expect exports to increase by 2.5% in 2010, with imports tipped to rise by around 10%.

Shane Oliver’s big watch is on the US economy.

“The two big risks are that US consumers return to cutting spending and paying down debt and/or that policy makers start tightening too aggressively, too early. However, a stronger labour market should help US consumers. It also seems that policy makers are keen to avoid a re-run of Japan in the 1990s and the US in the 1930s, when policy was tightened too aggressively.”

China

As with last year, the economic growth of China will have a huge impact on the performance of Australia in terms of currency rates, commodity prices, exports and even government revenue.

Craig James says the China story is far from over.

“The world has never before witnessed an economy with 1.3 billion people going down the path of industrialisation. China’s demand for resources will no doubt amaze some commentators over the next few years, but the demand is entirely understandable when you consider the size of its population. The greatest limiting factor on China’s growth will be its access to resources. And there is the very real prospect that commodity supply will again fall well short of demand, driving prices higher.”

Westpac is predicting the world’s powerhouse economy will continue with its strong growth, expanding at 9.4% during 2010. The key to this forecast, like everything in China, is the Government continuing with its expansionary policy.

“The most crucial input to these forecasts is a view on the development of policy settings,” senior industrialist economist Huw McKay says. “On this front the administration has made it abundantly clear that they have no plans to alter the aggregate policy stance. Moreover, as we have been arguing, the administration has announced… that the next fiscal cycle of five years will be initiated with an expansionary stance.”

Retail sales

While consumer confidence bounced back sharply towards the end of last year, cash registers have not been ringing as loudly as the sentiment figures might suggest. Lingering concerns about job security and the high level of debt being carried by many households are likely to play on consumers minds for a few months yet.

Westpac believes the overall trend for retail sales is in 2010 positive, with growth of 3.6% expected across the year. Segments that should perform well include foods and basic staples, cafes and restaurants (rebounding from last year) and household goods, which should benefit from an uptick in housing investment. Sectors that will show more modest growth include clothing and department stores.

Despite this mixed outlook, Westpac says retailers should be able to enjoy relatively strong profitability early in the year as sales gradually improve.

“The recovery in sales is combining with resilient pricing and a subdued cost base to produce a very strong ‘sweet spot’ for retail profitability.”

Sharemarket

Australia shares returned 32.1% last year – a staggering result given we thought the world was going to end in the first few months of the year.

Such a strong run has left many wondering whether the Australian sharemarket has any room left to run, or indeed whether the market may now by overpriced.

Shane Oliver sees more room to rise and is tipping a return of 17% in 2010. But rising rates and question marks over earnings could make for a bumpy ride.

“Sharemarkets are likely to rise further, thanks to the combination of improving economic and profit growth, low inflation and sustained low interest rates at time when there is still plenty of cash on the sideline.”

“However, shares are moving from a multiple driven phase to an earnings-driven phase. This, along with moves towards higher interest rates, will likely result in more volatile and constrained gains than has been the case since March.”

He expects the Australian ASX 200 and All Ordinaries indices are expected to rise to around 5600 by the end of 2010.

“We see Australian shares continuing to outperform traditional global shares, reflecting their higher dividend yields and stronger growth prospects.”