Businesses across Australia have been facing challenging conditions over the past year – stock markets have crashed, oil prices have soared and sunk, and mounting uncertainty has put most expansion plans on hold.
IBISWorld expects things will get worse before they start getting better towards the end of 2009-10. The following variables will be the key indicators of the recovery.
Although interest-rate cuts, handouts from the Federal Government, and positive GDP growth in the March quarter of 2009 resulted in some short-term optimism, consumer sentiment is expected to fall due to increasing unemployment and the return of a contracting GDP in the June quarter of 2009. Consumer sentiment is projected to decline further in the September quarter of 2009, before rising back towards 100 (the point separating optimism from pessimism) in 2010-11.
In the meantime, Australia’s households will continue to see their net wealth disappearing. IBISWorld expects that, despite the Federal Government’s best efforts, household net worth will decline by 9% over 2008-09, having already slightly declined over the previous financial year.
The largest component affecting household wealth for many Australians is the value of their home, which has been declining since June 2008 and is projected to continue falling for the remainder of the 2009 calendar year. A second key component is share prices, which affect the value of superannuation and other savings. The sharemarket is expected to finish 2008-09 well above its minimum, but it will almost certainly be substantially below its level of a year earlier. A strong recovery is expected by 2010.
Having cut the cash rate by a total of 4.25 percentage points since September, bringing rates down to their lowest level since 1960, the RBA appears likely to leave rates on hold in coming months. However, IBISWorld expects rates to be cut later in the year, as the stimulus spending begins to wear off.
The consumer price index increased by just 0.1% over the March quarter of 2009. Although it is estimated that prices accelerated in recent months, overall inflationary pressures over the short term are relatively benign and anchored by poor demand. This gives the RBA the freedom to cut interest rates without being overly concerned about its inflation target. Rates are forecast to reach their nadir in the December quarter of 2009-10. Interest rates are projected to begin rising again in the June quarter of 2010 after the downturn reaches its trough, to guard against rising inflation during a renewed economic expansion.
High interest rates and then the credit crunch drove dwelling approvals lower in every quarter of the 2008 calendar year. Lower interest rates and the increase in the First Home Owner Grant have resulted in the beginning of a recovery in dwelling approvals in the June quarter of 2009.
Continuing low interest rates and improving consumer sentiment are forecast to result in a sizeable increase in approvals in 2009-10. In 2010-11, a recovering economy and higher sentiment are expected to result in a rapid increase in approvals, returning the measure towards 2003-04 levels. IBISWorld forecasts that the tight market and strong population growth will push the number of dwelling approvals to record highs in 2011-12 and 2012-13.
Residential property values took a beating in 2008 as rising interest rates and the economic downturn weighed on prices. While this trend is expected to halt in the June quarter of 2009 due to the increase in the FHOG, residential housing prices are forecast to fall again in the September and December quarters of 2009, as a sharp rise in unemployment outweighs improving affordability.
The top end of the housing market has suffered the sharpest falls in prices; the bottom end of the market, however, should prove more resilient, underpinned by under-supply and falling mortgage costs. The impact of the downturn is also likely to vary around the country, with Perth, Brisbane, and mining boom towns expected to register the largest falls in prices, and Melbourne and Sydney remaining more muted. House prices should return to positive growth from the March quarter of 2010 as confidence returns in an environment of relatively high affordability, and as strong immigration adds to already tight supply.
The credit crunch has made operating conditions for many businesses much more challenging. Profits have suffered as credit has become more expensive, and companies have been forced to cut back staff numbers to improve cash flows through reducing expenses.
From a low of 3.9% in February 2008, unemployment had risen to 5.7% by May 2009. As the number of job losses mounts in 2009, the unemployment rate is expected to remain at 5.7% over the June quarter but rise as high as 6.8% over the December quarter. Job losses will cease to outpace job creation in the first half of 2010, but population growth will result in the unemployment rate continuing to climb to a maximum of 7.5% over the September and December quarters of 2010.
As economic growth accelerates in 2010-11 and 2011-12, job creation will gather speed and the unemployment rate will contract back towards 5%. Gains in the sharemarket will raise the value of superannuation funds, and many baby boomers will retire in 2011-12. They will continue to leave the job market until 2030, keeping downward pressure on unemployment.
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.
