More grief for retail and tourism

Interest rates are likely to settle at a base rate of 2.5 per cent by the end of the year and the Australian dollar will claw towards 80 cents.

THAT’S the forecast from Commonwealth Bank senior economist of global markets Michael Workman. Speaking to members at the Australian Institute of Company Directors at The Villa, Workman forecast a dire outlook for retailers and tourism.

The tourism sector is under threat with an expected 7.5 per cent unemployment in Queensland by the end of this year.

“Tourism related areas will suffer due to international markets, people are afraid to spend money,” says Workman.

“Over the next six to nine months, unemployment is going in one direction – up. The problem is the terrible amount of uncertainty on how much the retail sector is going to contract and they’re the biggest employer. So if things turnout to be very bad for them, the unemployment rate will go higher than 8 per cent. Without the Federal Government’s helicopter grants, the retail sector would be in a lot more trouble.”

Workman says Australia is now in a ‘mild recession’ and will bank on China for recovery, whereas Iceland, Ireland and Japan are in serious depression.

“Trading with emerging countries and not those that are advanced, will help to drive the recovery of the Australian economy,” says Workman.

In the property sector, rising vacancies and a drop in values have led to a commercial market downturn, while residential construction is set to increase slightly due to low interest rates and the extension of the First Home Owners Grant.

There’s also strife ahead for the Australian automotive industry with news that General Motors is frog-hopping toward bankruptcy in the US. GM is racing against time to convince the Obama administration it is viable and should be given another multi-billion dollar injection of funds. The company has already borrowed $25 billion from the Government and has until June 30 to deliver a restructuring plan with a focus on being leaner and greener. If it fails, it could lead to the sale of Holden in Australia with an Indian manufacturer believed to have expressed interest.

“It looks like that there are some groups that are willing to buy Holden in Australia if GM wanted to sell them. Ultimately Holden here is a very profitable group and you want to see them survive,” says Workman.

The pressure is now on the US to retain its AAA credit rating as the country slips further into recession, but Workman explains that from a ratings agency point of view – many of whom are based in the US – one must look at a country’s ability to repay debt.

“As an outside observer, you might find this a little bit odd, given that they (US) have downgraded a lot of other countries in the world that seem to be similar, in terms of numbers,” he says.

“I suppose it’s ultimately their (US) size and it’s still the biggest economy in the world, so they only have to have a small increase in taxation to actually address their debt issues and maybe that’s what will happen in two or three years time.