RESILIENT BRISBANE MARKET TO WEATHER GFC2 STORM

Written on the 20 February 2012

RESILIENT BRISBANE MARKET TO WEATHER GFC2 STORM

THE World Bank has warned of a second, possibly deeper global financial crisis (GFC2) looming on the horizon. However, BT Financial Group chief economist Chris Caton (pictured) believes the outlook is not all bad for Brisbane.

THE World Bank has downgraded its 2012 global growth forecast from 3.6 to 2.5 per cent with wealthier countries only expected to grow 1.4 per cent – down from 2.7 per cent.

However, one must look past the media ‘beat-ups’ to see that even if things eventuate like the World Bank has forecast it will be nothing like the 2007 GFC; we must differentiate between what they think will happen and the small downside risk.

International risks have been overstated by mainstream media. It is quite clear that Europe is in a recession. The US is expected to grow 2.2 per cent in this presidential election year, slightly below an earlier forecast 2.9 per cent. However, the US keeps defying these projections and it would not surprise me if it once again beat the predictions. China’s estimated 0.8 per cent slow-down in to 8.4 per cent (or even if it reaches 7 per cent) is not that bad either.

The World Bank has mentioned the slight possibility of a downside risk. If this prediction indeed comes to pass and credit markets seize up, we may end up with something worse than what was forecast.

If GFC2 eventuates, we are looking at significant economic weakening and slower growth. It is probably not enough to cause an official recession but it is enough to slow growth. In the worse-case scenario Queensland faces a year of constrained growth. Mining will continue to expand but tourism, manufacturing and retail will continue to be affected by the Australian dollar’s high exchange rate.

Should it strike, Australia will not be protected from GFC2 because we are hostage to the global economy. Even China will not protect us because it will also be affected. Europe is a big export market and if they are no longer buying Chinese goods the Communist-ruled nation will probably reduce demand for Australian resources.

Last time round China only briefly suffered from the GFC before it recovered. Australian exports continued quite strongly but commodity prices for iron ore, coal and copper declined significantly.

The Federal Government at the time had a $10 billion surplus to stimulate the economy through $1000 hand-outs. However, we will not have as much fiscal flexibility since the Federal Budget has reached a $47.7 billion deficit.

The direct effects of the European debt crisis and nations defaulting on their debts are negligible on Queensland. There is no reason to worry. Greece, Hungary, Portugal, Ireland and Italy are small countries. Australia raises money offshore so those rifts have potential to affect the cost of funding and ability of banks to pass on interest rate cuts from the Reserve Bank of Australia (RBA).

However, what happens domestically is actually the factor that presents tangible risks. Queensland has suffered from massive overbuilding and property price crashes in Brisbane and on the Gold Coast. If the RBA further cuts interest rates it will help the property market recover.

The labour market has reached an unusual predicament. The national unemployment rate is 5.2 per cent and for the past five years it has been at the lowest levels seen in 30 years. This has created consistent labour shortages in some sectors. There has also been rather static or ‘sideways’ employment growth compared to calendar 2010, but it is still at relatively good levels.

Regional Queensland’s unemployment rate is almost twice the national average at 10 per cent. There have been suggestions that the actual unemployment figure is higher, but I believe discouraged job-seekers could only add a further 2-2.5 per cent to the overall jobless rate.

There are views that low unemployment will fuel inflation, but I do not believe we have this kind of problem in Australia. The RBA believes the best way to run the economy is by increasing interest rates to keep inflation low. It delivered interest rate cuts in November and December, suggesting weak market confidence persists.

The Westpac measure of consumer sentiment rose in January, but that is often the result of interest rates reductions. The rise is disappointingly small. Consumer sentiment is at 97, which is 4 per cent lower than its long-term indexed average of 101.

Retail sales data looks weak at department stores and fashion retailers. However, sales made by entertainment, restaurant and offshore online businesses appear stronger. It is the effect of a high dollar and online competition. Spending has not been as fast as income growth, suggesting shoppers are saving more of their income.

 

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