Financial and Economic Crisis and Forecasts

In July, 2008, the conventional wisdom in Australia was that inflation was a major concern, and forecasters argued for rising interest rates to curb inflationary tendencies and excessive economic growth. They were wrong!

The threat to Australia's economy in July 2008 was deflation, not inflation. The blinkered focus on the domestic economy failed to consider the impact of international developments on the Australian economy. Nobody bothered to ask the simple question, "What happens to Austalia's economy, if the United States economy moves into recession, China's exports to the United States take a sharp dive, and China's economic growth drops?"

That is exactly what happened. As early as 2006, housing construction in the United States began to decline. By early 2009, housing starts in the United States had dropped from over 2 million annually, to just 500,000, the economy was in rapid decline, and China's rapid growth of more than 10% annually decelerated to less than 7%. The rapid expansion of our minerals exports to China dropped sharply and despite government and Reserve Bank efforts to stimulate the economy thanks to a massive fiscal and monetary policy response, our economy has averted an official recession (two quarters of negative growth) in early 2009.

The question now is when will it turn? Again, the forecasters have missed it. The upturn has already started, even though it is not evident in the data. The sharemarket has risen by 20% in recent weeks. The housing market in the United States has hit rock bottom, and will follow the upward trend in the sharemarket in the third quarter. Housing starts in the United States at only 500,000 annually are way below underlying demand of 1.5 to 2 million, and the market is on the verge of a rapid upswing. By the end of the year, housing starts in the United States will be close to 1 million on an annual basis, and in early 2010, the economy will be in a cyclical upswing, spurred on by the impact of government stimulatory programs in the United States and in other countries. China will follow, as it's own stimulatory program kicks in and Australia will be into a sharp upswing by mid 2010, as the effects of fiscal stimulation, historically low interest rates and improving export markets all kick in to move the economy into a sharp upswing.

Watch for a synchronized worldwide cyclical upswing by mid to late 2010, and a booming Australian economy.

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