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Already, forecasters are projecting into 2012. What will it bring? More turmoil, or back to solid growth for companies and nicely rising share prices?

Some Australian analysts are adamant that next year will bring riches. They say that there are myriad reasons why Aussie punters have cause for celebration – from the European crisis that’s now done and dusted with newly minted Prime Ministers focused on ‘making money’, to China forecast to grow by 8% a year, which they say translates into high commodity prices. They also point to rising sales out of the US, and Australia’s new uranium market – India.

It all sounds rather exciting, but why do we feel so uneasy? In the past we could scream ‘China’ or ‘India’ or ‘rising commodity prices’ as the reason for optimism, but these arguments are starting to sag; they don’t have the same ring like they used to. The simplicity of betting the house on ‘China’ or ‘India’ seems reckless in the midst of these global tremors.

Australia survived the global financial crisis relatively well largely thanks to Government stimulus packages. As consumers and businesses pared back spending, the government more than made up for it. But lately the government has been warning that stimulus is out and austerity is in to bring the budget back to surplus in 2012/13. In essence, it means that the government is joining the ranks of penny-pinching Australians – a move that could affect the country’s fragile growth trajectory.

The word of the moment is fiscal restraint, which is a pretty way of saying slashing government spending. Gillard is racing to put out her mid-year economic review before Christmas, which is believed to contain significant cuts to health, welfare, and so forth.

Although we tend to dismiss such reviews as boring political stuff, investors should definitely assess the impact of this review that comes at such a crucial time. Heavy cuts to social security should be taken as a warning for the outlook for retailers specifically and economic conditions generally. And companies that rely on Government contracts across engineering, aged care, pharmaceuticals and defense may lose crucial revenue pipelines.

Bob Brown reportedly warned: “ Make no mistake, people will lose their jobs, there are services that will be slashed.’

Small business is struggling

The Gillard government may shelve the proposed cut to the company tax rate, which was slated to fall from 30% to 28%. It’s possible that other business initiatives to promote the small business sector may get canned as the super mining tax is slimmed down to appeal the big end of town.

Over 1 million Australians – that earn less than a million dollars a year – own a small business. But in 2010 and 2011, a shocking 40% have reported losses. What’s concerning is that small business owners can’t lose money forever and will eventually collapse in a pile of debt. And this is what’s happening – with 10,228 insolvencies in the 12 months to September 30, the highest yearly total ever.

Opposition Leader Tony Abbott told ABC television that a reduction in the company tax is irrelevant compared to the importance of supporting big miners. ‘No one much is going to notice a two per cent cut in company tax. But everyone will notice a massive hit on the mining sector,’ noted Abbott.

This thinking does increase the risks to the Australian economy if the mining boom comes to a grinding halt; the non-resource sector is already poised to fall further.

It is unusual policy from both sides of government to force fiscal restraint at a time when 40% of small businesses are on the verge of shutting up shop.

Normally, as the theory goes, fiscal restraint is used during boom years and expansionary fiscal policy is employed as the economy begins to slow. However, currently around the globe from Italy, Ireland, France, UK, Germany and so forth – governments have been pressured to pare back spending in the face of sluggish growth. Hardly surprising, unemployment is skyrocketing and asset prices are falling in a heap.

The moral of the story is to keep an eye out for the extent of the cuts in this upcoming review. Deep cuts at this time in the cycle will hurt.

Australia’s love triangle

The front page of China Daily held up a suggestive photograph of Julia Gillard embracing US president Barack Obama fondly with the headline: “Obama beefs up defense ties.”

It discussed Gillard’s unprecedented foreign policy decision to unanimously accept the US military build up in Australia – which so far consists of plans to send some 2,500 US marines to sunny Darwin. It didn’t discuss the decision to send US military aircraft, including bombers, fighters, tankers and spy planes – nor the US ships and submarines that are scheduled for later.

Chinese Foreign Ministry spokesman Liu Weimin said: ‘Faced with a gloomy global economy, whether broadening military alliances is an effective model for regional integration is worth discussing.”

Australian investors have reason to be a tad concerned about China’s relationship with Australia down the track. China’s demand for our natural resources has underpinned our record mining boom – and has saved Australia from the worst of the global financial crisis. Wasn’t it all about China just a few months ago?

Obama said that an enhanced American presence is not meant to isolate China, while at the same time singling out China as a case in point.

As we’ve discussed previously, the US is leaning on China to float its currency – with agencies such as the International Monetary Fund (IMF) telling Beijing that it should relax control of its currency and hand over more freedom to central banks. A recent IMF press release stated that China’s financial system is at risk from huge debts accumulated since the 2008 financial crisis, rising defaults and sharp falls in property prices.

Indeed, the heat is on China.

The outlook for 2012

Australia is no longer the forgotten land down under, a land of endless beaches, barbeques and sport. We are now part of a shift in US foreign policy in which the Asia-Pacific is key, according to Obama’s speech this week. “As we end today’s wars, I have directed my national security team to make our presence and missions in the Asia-Pacific a top priority,’ Obama said.

No wonder we’re starting to feel edgy.