Today we’re talking to an old friend of SmartCompany, IBISWorld founder Phil Ruthven, who has spent decades charting the growth and changing make-up of Australia’s business environment.
Today he reveals the industries that entrepreneurs should focus on in the next 12 months, which states are going to keep growing and why 2010 is going to be a great year for entrepreneurs.
Phil, we’ve emerged from a year in which you originally thought there was going to be a recession. We’re pleasantly surprised to find that that wasn’t the case?
I always said we were prone to a recession but we’d probably miss it. I’ve been pretty consistent on that over the last two years actually. I wasn’t nearly as gloomy as the Prime Minister and some of the others either.
We certainly didn’t end up getting all that close to recession at all in the end. Does that highlight the resilience of the economy these days?
I think what it highlighted was that we were the most bullet proof economy in the western world. As it turned out that we were the only country in the OECD group. Every other country did, every country in Europe, America and Canada.
That is because we had grown a balanced budget and surpluses under the Howard Government for a long, long time, so we had no real debt problems. Secondly, we had our banks very well supervised by APRA and thirdly more of our trade was with the Asia Pacific, which didn’t suffer the downturn of course that either Europe or America did. So our trade held up better than most countries as well.
It’s not very popular to say it, but I think Australia would have to thank the Howard Government for making it relatively bullet proof during the 2009 GFC. It had nothing to do with the actions of the present government. In my opinion the stimulus package to consumers was totally and utterly unnecessary.
The main reason being James, what happened by the middle of last year, when everybody was getting nervous, is close to $60 billion worth of discretionary income over and above the previous year which wasn’t a recession of course, was injected into the economy. That’s because the mortgage interest rates had dropped from 9.25% down to 5.25% and that freed up something like $52 billion worth of after-tax income for Australian households and the petrol prices had dropped. Once the petrol prices had dropped from $145 a barrel to $60 that freed up another $8 billion. So all up Australian households were better off by pretty close to $10,000 per family in discretionary income than they’d been in 2008.
So to offer them more money is like offering a drunk another drink, it just didn’t make sense. All the Prime Minister had to do was to simply say ‘look for this, this and this reason Australia’s in much better shape than the rest of the world, there’s no need to worry, there’s no need to pull the purse strings too tight’. But no, we were getting the direct opposite from the Prime Minister and the Treasurer.
In fact, they kept saying we were in recession right up until October last year or even November. I mean they just didn’t have a clue what was going on and I think they made us nervous as well as the overseas news pouring in over the TV. We lived on a bit of a fear that was going on around the rest of the world. But our own government I think really was the biggest negative thing we had last year. They were talking down the economy and I think for political reasons so that when they gave the giveaways out, it made them look like saviours. Well, that was just ridiculous.
Are you worried about the costs of those stimulus measures down the track?
Yes I am. We’ve never had a recession in my entire life that’s been caused by the consumer because there’s never been a year in my life – and I’m well over 60 – when a consumer has spent less in one year than in any other year. So all the recessions we’ve had, like the ’91/’92 recession and the ’82/’83 recession, in fact all the recession of the post war years have been caused by a collapse in capital expenditure, not consumption expenditure. And therefore to give a stimulus to consumption expenditure was just the most unnecessary and stupid thing I think I’ve seen a government do for a long, long time.
But if there’s any necessary stimulus in the future, it could only ever go into capital expenditure and that’s always the dangerous area. And even that wasn’t dangerous last year or even this year mainly because we had so much in the pipeline, bolstered a lot by the mining industry which we well know.
That we had so much work in the pipeline that even though some of that was cancelled, we still had enough really to not see capital expenditure fall as sharply as it’s done in previous times. Like in 2001 it fell very sharply too but not enough to give us a recession. But ’91/’92 and ’82/’83, they were all caused by massive collapses in capital expenditure.
So I think if the government sees good reason to support anything, it should only be capital expenditure by business, not anything more to do with the households. That’s already been grossly excessive in my opinion.
So what sort of a year are you looking for in 2010?
Obviously a better year but one that internationally I think is still going to have its problems. I mean, generally the consensus is that the world will grow at something like 2.5% this calendar year of 2010 and I think Australia will go around about 2.8%, which is pretty well the consensus of the moment. Not often do I follow consensus but I think we’ll probably go close to 2.75% growth this year.
There are some warning signs out there, but they’re warning signs probably more for the rest of the world than it is for us. I really don’t see us having a lot of troubles. I mean, there are things that are going to build up that might be a little unpopular in later years. Like inflation will probably be around 3% this year which in historical terms is not all that ghastly. But I think there is a grave risk that in the next five to six years we could creep up to double-digit inflation. And that’s brought around by a whole raft of things.
I think there will be a wage push as we get back to full employment again and the unions are going to have a lot more power than they had under the Howard Government because of the change in the workforce laws and therefore you are likely to see a big wages push. Perhaps not unlike what we saw in the Whitlam era way back in the mid-70s or early-70s.
I think house inflation, because of the shortage of housing, is another area that would concern me over the next five years. So while I don’t think inflation will be an issue for 2010 this calendar year, I think it’s certainly going to be an in issue within a year or two.
Interest rates are certainly are going to rise, interest rates are going to go up at least 1% this calendar year I would have thought. We’ve already had one shot at that earlier this year. And I think mortgage rates are heading to also go up into double digits and I’ve forecast for a long time that we will get into 10% or more mortgage rates by 2013 or 2014. I think that’s largely inevitable at this stage. So rising interest rates will curtail what might otherwise be some wild events.
On the other hand I think the sharemarket is going to go rocketing over the 5,500 on the All Ordinaries or maybe even much higher, but certainly up to 5,500. Because I think people have been underestimating the profitability of our major corporates, particularly the banks, and I think it was the Commonwealth Bank came out the other day with $6 billion annualised profit. People were saying no the banks were already overpriced, well that’s not true. And in fact I think the PEs are pretty conservative at the moment so I think the sharemarket is going to have a very good year in 2010.
If I was worried about a number of things, one serious worry, apart from burgeoning inflation, is the dollar. It’s so overvalued at the present time; it’s making it very difficult for our tourism industry, our inbound tourism industry to grow. And our inbound tourism industry is already a $28 billion market, which is almost three times the size of our agricultural exports. So to hell with agriculture, it’s tourism that we’ve got to worry about. And the dollar’s not helping that at all. I mean the mid-90s exchange rate against the US dollar is just terrible. So the dollar does worry me and the dollar is going to stay strong as long as the US is weak. The minute the US starts to look like it’s got a solid recovery underway, our dollar will come back fairly quickly to below US80 cents. Probably one of these days, perhaps in two or three years it will get back to where it should be, which is about 65-66 cents. It’s so overvalued, it’s terrible.
I think the other dampener for the year, because it always is a bit, is an election and that will be due of course in the normal course of events in around November and I don’t see a double dissolution anywhere in sight. I think if the Government was to cause a double dissolution on the ETS scheme, then they would be committing suicide because I think by the time the election comes, there’s a very significant part of the population which sees that as purely a political exercise and has nothing to do with the global warming debate, because to try and push that through in Copenhagen hasn’t succeeded.
I mean here we are, 1.5% of world’s carbon emissions, what on earth do we think we’re going to do by penalising ourselves with a massive tax which is not going to help our trade or exports or anything? It’s just purely political and I think it’s self-advancement on behalf of a few of our key politicians. I think any attempt to go for a double dissolution on that basis would just be folly of the worst style.
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
