What will 2010 hold?

As the year draws to a close, many are wandering what the future has in store. No one can know for sure, but there are some clear signs that the year ahead will be better than the two just gone!

1. Back in business

The economic outlook for 2010 is certainly looking a lot brighter than it was 12 months ago. Whether it was economic management or just the stars being in alignment, Australia if forecast to have growth of 3.25 per cent next calendar year.

Business and consumer confidence are both strong, unemployment is expected to peak well below the May budget predictions of 8.5 per cent, inflation is under control, and interest rates may rise but only back to neutral levels.

2. Boom times coming?

What’s not to like? Of course it won’t be all roses but even Reserve Bank Governor Glenn Stevens is optimistic.

“Economic conditions in Australia have also been stronger than expected in contrast to other developed economies,” says Stevens. And he believes the economy is heading for boom times, again on the back of resources.

3. Dodging a bullet

Why Australia has fared so well compared with other western economies is debatable but our regulated banking system and strong demand from China have certainly helped us escape the full impact of the global financial crisis.

That aside, some of it can be explained by the Australian psyche. It’s almost like we have said: “Recession, OK, got that; what’s next?” Flippant perhaps but much about economic performance comes down to confidence and if enough people share that attitude, little wonder we are optimistic going forward.

4. Confidence is key

Confidence holds the key. I was recently in Ireland & the difference to Australian confidence was quite noticeable and staggering. Here in Australia, the indexes for both business and consumer confidence are at or close to record highs, and there’s also confidence in the share market which has staged a strong recovery over the course of 2009 to eliminate much of the savaging from the year before.

After touching a low of 3111.7 in March this year the market is now trading up around the 4700 mark – still a way off the peak of 6850 but nevertheless on its way.

The absolute bargain basement prices may not be around now, but there are still plenty of buying opportunities for investors with a long-term perspective.

5. Where to now?

So what is the outlook for the economy in 2010? There’s the old saying that if you put 10 economists in a room, you’ll get 10 different opinions.

A year ago, those 10 economists may well have been unwilling to put any opinion forward as the global economy went into freefall. But now there’s a swagger again in their economic forecasting. So what is the consensus for next year?

6. A lid on inflation

Inflation is expected to fall within the Reserve Bank’s preferred 2-3 per cent range. Indeed, the Reserve Bank expects underlying inflation to fall to about 2.25 per cent by late 2010 before gradually increasing to 2.50 percent over 2011. With no wage pressures – unemployment on the rise keeps a lid on wages – inflation is not an issue in the short term.

7. Interest rates neutral

Traditionally interest rates have risen on fears of inflation, as the RBA’s mandate is to keep a lid on inflation. However, with the GFC, interest rates were lowered to “emergency” levels of 3 per cent. Now the economy has escaped recession, RBA governor Glenn Stevens says rates will move back to more neutral levels. Already we have seen two consecutive 0.25 per cent rate rises and most economists expect the rate to be around 4.5 per cent by the middle of 2010

8. Unemployment peaking

The recovering economy means that unemployment will peak well below the May budget predictions of 8.5 per cent. Currently the rate is just below 6 per cent and opinion is divided as to whether it will hold this level or edge up to 6.5 per cent.

Much of this lower-than-expected unemployment rate is linked to the flexibility of the Australian workforce with many employees agreeing to work shorter hours rather than lose their jobs.

9. Commodity prices on the up

Commodity prices are trading substantially off March 2009 lows and gold in fact is at record levels, having powered through the $US1100 an ounce barrier. Iron ore and coal are enjoying strong demand from China and gold is benefiting from concerns over the US dollar.

10. Aussie dollar rising

The strong Aussie dollar is of course bad news for exporters and those companies with offshore earnings. But it does help cap inflation as imports are cheaper. At US90c plus, talk of parity in 2010 is definitely on the agenda. The Australian dollar is a proxy for risk – if overseas investors want exposure to China and other commodities, then our currency delivers. The dollar is also getting a boost from the higher interest rates being offered here.

The bottom line

The general improvement in economic data together with the drop in risk aversion means most equity markets are recording strong gains. A year or two from now, those who took advantage of today’s market opportunities will hopefully enjoy the expected continuation of these gains.