Alan Oster
 After the sharpest rate of decline since the Great Depression, it now appears that the global economy returned in quarter three 2009 to modest growth. Asian economies, fed by a very large Chinese stimulus package, are leading the way. That said, a great deal of uncertainty remains. Indeed, it appears that a good deal of the better performance has been induced by policies such as the ‘Cash for Clunkers’ car allowance rebate scheme in the United States. The big questions appear to be: What will happen after the peak in the policy stimulus? Will growth fade and are markets – especially the equity markets – getting ahead of themselves? Certainly our expectations are for a very subdued 2010, with global growth of around 3 per cent. This is much more low-key than the typical recovery phases of the past. Headwinds to growth remain in the form of consumer de-leveraging, still-tight bank credit policies and the progressive unwinding of very aggressive monetary and fiscal policies. We expect global rates to start increasing in late 2010 while retrenchment of government balance sheets is likely into 2011. Against such dire global circumstances, Australia continues to perform remarkably. Thus, NAB’s August Business Survey shows confidence recovering to its highest level for six years, while private demand continues to improve. Similarly, the PricewaterhouseCoopers Private Business Barometer survey shows more businesses meeting or exceeding their targets than falling short. That said, as is clear in the Private Business Barometer, there is plenty of uncertainty about the operating environment. NAB’s Business Surveys show this view is shared by big businesses. Looking back over the past six months, Australia’s outperformance has primarily been driven by the robust state of local banks, the continuing strong demand for our commodities (especially from China), aggressive rate cuts and extraordinary front-end loaded fiscal measures. While these positive factors will remain, we have already probably seen the peak in quarterly impacts from the fiscal stimulus package. Indeed, it appears that a lot of growth has been brought forward by the combination of cash drops, investment allowances and the First Home Owners Boost. Thus, the bounce in business and consumer confidence has not been reflected in significant jumps in business demand for capital spending or credit. Similar to our expectations, the Private Business Barometer points to an environment where large sections of the business community see little growth in the next three to six months. Hence, businesses’ strategies are focused on preparing for more broad-based growth in 2010. In a similar vein, businesses are very guarded regarding their hiring and investment decisions. At this stage, much of the additional demand is being met by running down inventories or imports rather than by utilising new production. Also, while unemployment has not risen as much as we feared and is expected to peak at around 6.7 per cent in late 2010, businesses are very actively managing their labour utilisation and costs. This is seen in the very aggressive falls in hours worked. Put slightly differently, capacity utilisation remains relatively low, with little prospect for improvement. Those forces will see inflation continuing to slow to around 2 per cent in 2010. Looking to 2010, after a relatively flat second half of 2009, we expect GDP to increase by around 2 per cent in year-average terms – and by a faster 3 per cent during the course of the year. For a central bank, this is not an environment that needs emergency low interest rate settings. We expect the Reserve Bank of Australia (RBA) to raise rates by around 75 basis points by early 2010. Thereafter the RBA will be somewhat cautious as it waits to judge the impact of its actions. Our forecasts essentially see further adjustments of around 50 basis points every six months – bringing the cash rate to around 4.25 per cent by end- 2010 and around 5.5 per cent by late 2011. The latter is roughly where the RBA judges policy to have a neutral impact. In summary, businesses should, and appear to, expect a relatively flat period in the next six months as the peak impact of fiscal policy passes, but with growth re-emerging on a more sustained footing during 2010. The near-term flat period is particularly likely to affect consumerrelated businesses. Unemployment will continue to rise, but to relatively manageable levels, while interest rates will rise moderately back to more normal levels. Fiscal repair will probably be more a 2011 story. If this outcome emerges as expected, Australia, while still facing a relatively difficult period, will have emerged from the global financial crisis in remarkably good shape. | | Alan Oster Group Chief Economist National Australia Bank Ltd |