Three views on 2012

Put any group of economists and investment professionals together, and about the only thing they will all agree on is the likelihood of disagreement. We spoke to three experts to find out their views on what we might expect to happen in the Australian and global economies in 2012.

Joe Bracken, BT Investment Management Head of Macro Strategies, Besa Deda, St.George Chief Economist and Patrick Farrell, Advance Head of Investment Solutions each have their own views on how the Australian and global economies will go over 2012.

Volatility and uncertainty, in all sorts of areas, including exchange rates, interest rates, international economic and political stability, housing prices and of course, the share market, has been a defining feature of the past year, or even years, seemingly since the onset of the GFC – which often feels like it has never quite ended, or worse still, might even make a resurgence. So, what’s ahead of us?

Patrick Farrell, 
Advance Head of Investment Solutions

Patrick Farrell sees continuing problems, which require active solutions. “Markets are looking for greater certainty to get some investment momentum behind them – and that certainty is required not only at the investor level, it’s also necessary at the corporate and banking level. We need more than just politicians, especially Europeans, to make up their minds and to decide what path they’re going to take. Businesses need a more stable environment to help them develop their plans for investing, staffing, capital expenditure, mergers and acquisitions and overall strategies for growth.

“Based on the fundamentals, shares in general look very cheap, and bonds in general look very expensive. If you considered them on that basis alone, you should be able to say that shares will do really well and bonds won’t do so well, and that that should eventuate at some point in the future. However, with all the uncertainties at the moment, it’s hard to say with confidence when market behaviour will return to more normal patterns. I think we need to assume that the current market volatility will continue for at least another 12 months, and probably even into 2013”, Patrick said.

It’s not as if the problems only involve the Europeans. Patrick says that the US needs to get its political act together too, and notes that as the US presidential elections of November 2012 draw nearer, greater market and investment instabilities are likely to arise.

Joe Bracken, 
BT Investment Management Head of Macro Strategies

As far as BTIM’s Joe Bracken is concerned, the world is only just emerging from “the longest and certainly deepest recession since the Great Depression - which you just don’t bounce easily out of. That said, overall, we expect the world to produce positive but unspectacular growth over the next year, a sort of slow, grinding recovery. That’s our overarching, cautiously optimistic view”.

Joe sees Europe as the major blot on the economic landscape, saying that to date it has been a matter of all talk and no real long-lasting action in tackling the continent’s sovereign debt levels and widespread economic irresponsibility and ineptitude. “We are yet to see a solution to Europe’s problems”, which clearly also remains the rest of the world’s problem while the situation carries on unchanged. In fact, the ways things are going, or rather, not going, Joe thinks Europe “will be hard pressed to avoid recession in 2012”.

The US gives Joe greater joy. “The US economy is actually okay. A lot of its economic numbers, while not spectacular by any means, are decent. Growth appears to be reasonably steady and solid, unemployment is beginning to come down, the housing market (while not recovering) isn’t getting worse, and generally, manufacturing, at the very least, doesn’t appear to be declining. It shows all the signs of an economy that has bottomed, and is now beginning to recover. That’s very important because for the world overall, the US economy and indeed the US consumer are vital. You cannot have a global recovery while the US is still in recession. Generally, the US leads the world out of a recession, and that’s what we’re seeing right now”, Joe said.

Naturally, such an economic outcome augers well for Australia, and Australian investors. Joe said Australia is indeed “in a relatively good place” economically. He explained we are geographically close to emerging Asian markets including China, Taiwan and Vietnam, all of which want our resources, and which we have in abundance. He said we escaped the worst of the GFC, our unemployment levels are low, and mining is surging ahead. As for China, “a story to which we are tied”, Joe said it “will falter a little”, due to an anticipated reduction in its exports to Europe during 2012, however he expects China’s growth still to be in the 7-8% region, which remains positive for the Australian economy in general and the mining industry in particular. “Being a small, open economy we are obviously influenced by what is happening in the US, Europe and China, and consequently while the outlook for the Australian economy may not look as rosy as it was a couple of years ago, it still looks reasonable”.

Besa Deda, 
St.George Chief Economist

As far as St.George Chief Economist Besa Deda is concerned, the Australian economy “is picking up, and we have seen that through the last six months” (of 2011) – admittedly coming off a low base in the earlier, disaster-affected first half of the year. Besa is looking for Australian economic activity to expand by 3.8% in 2012, which is above the long run average, and also above the nearly 3% growth she anticipates for the world economy. Besa also expects the ‘two speed economy’ tag to continue to apply, and made a prediction that will provide some joy to existing homeowners, many of whom suffered home valuation falls in 2011, where “we might see some stabilisation of house prices in the first part of 2012, with some price recovery in the second half of the year”. This is being pushed along by a national housing shortage – to the anticipated tune of some 140,000 homes in 2012, rising to over 160,000 in 2015, and a consequent tightening rental market. Besa added that “we are starting to see some early signs of recovery in first home buyer demand, particularly so in NSW where the housing shortage is quite acute” (with an expected undersupply of 104,000 homes in 2012, and 110,000 in 2013). Besa said, presently, there was not much happening in residential property construction, yet population growth is still relatively robust, which is exacerbating the housing shortage. This, coupled with low unemployment and declining interest rates, suggests that “at some point, dwelling approvals and building commencements have to recover. It also suggests that a collapse in house prices is unlikely - and that a residential property recovery is not that far away”.

With regard to Australian commercial property, Besa said building commencements generally should improve through 2012. “Office property is in the early stages of an upturn – we have seen the vacancy rate tighten slightly and it does look like the office market has passed the bottom of the cycle, where we are looking for gradual growth over the next few years”. Despite the well publicised difficulties that much of the Australian retail sector is experiencing, she anticipates a lift in retail property returns of about 5% this financial year, coupled with a lift of about 10% in returns from the industrial property sector, which is being underpinned substantially by mining industry demand.

Gazing into the crystal ball to determine interest rates – always a chancy exercise – Besa expected the RBA to cut rates at least once in 2012, probably doing so first in February, with the ongoing unfolding of the European situation being the key determinant of any more rate cuts later in the year. Joe Bracken also sees a February 2012 rate cut as probable, and, along with Patrick Farrell, considers a further cut later in the year as quite possible. According to Besa, “at the moment, the economists’ consensus view is that the cash rate will end up at between 3.5%-5% by year’s end”.

A final word on the Australia dollar

Looking at exchange rates, Joe sees the Australian dollar (in relation to the $US) ranging between 0.94c-$1.10 during 2012, while Besa expects it to be exchanging around $1.01 by the end of the year - quite a bold call 12 months out. She did add that consensus expectations amongst economists and investment professionals, at the start of 2012, ranged from 0.80c to $1.12.