Let's look at the core issues for 2011 as defined and summarized by Craig James at Commsec. Recovery has been the keyword of 2010...Recovery has been the keyword of 2010. While the US and Europe have suffered from serious job shortages, high budget deficit, deflation risks and a glut of housing, the problems faced by the Australian and Asian economies have been far simpler. The northern hemisphere has been ravaged by its economic woes, while our recession has been relatively shallow, and our recovery fast. The core issue for 2011 looks set to be sustainability. That is, maintaining economic growth without the risk of inflation.
Changes To Consumer Spending
The biggest change to consumer attitudes has been the GFC. And we've seen a transition from credit to debit card spending. The increase in interest rates has also contributed to this attitude change amounting to the highest proportion of household saving in 23 years.
The GFC has scared older workers away from retiring, and figures suggest they have a greater capacity to remain in the work force than their younger counterparts. While job security is far less for Gen Y and Gen X, it's these demographics who prefer to spend rather than save. This doesn't bode well for retailers.
Consumer spending alters dynamically alongside social changes - and we have seen much of that this year. With the explosion web connectivity, online shopping has taken off massively. This is impacting significantly on the retail sector, and while they're beginning to attempt an insurgency it will be difficult to predict what the long term changes to retail shopping are going to be.
Win or Whimper for the US Economy?
The US economy is being held back by an oversupplied housing market,high unemployment, bad State finances, and high federal budget deficit. Nevertheless economic indicators have been improving and retail spending is on the up. Once confidence begins to return unemployment figures will drop, and business will grow.
If the US economy battles out of its financial morass, it may lead to a stronger US dollar, which will positively affect the AUS Dollar. It would also be good new for stocks reliant on the US economy (eg Westfield, News Corp).
China now accounts for 24% of Australia's exports, and it's importance continues to grow. While this provides great opportunities for the Aussie economy, there are also inherent risks.
Although China has booming international cities (eg Shanghai), the country as a whole is still very much a developing country. But as they slowly grow to a Developed world lifestyle and economy, their economy will flatten, and so too will their demand for Australian exports.
Strength of the Aussie Dollar
The Aussie dollar is currently at a 28 year high, a situation that can be attributed to the growth of China and the poor US dollar. But constant changes to the value of the US dollar mean importers and exporters need to keep their eye on dollar value constantly. Forces from left field are always able to come in and fluctuate the dollar.
It seems that the Reserve Bank is working with assumptions of two rate increases in 2011. Some economists are assuming there will be three. It should be pointed out the RBA has a tight monetary policy and that small changes to rates have a large impact on consumer spending.
Are we Experiencing a Housing Bubble?
Home prices rose sharply over 2007 and 2008 because population growth was higher than the supply of new homes. The demand was further inhibited by interest rate rises. Since late 2009, interest rates were lowered and government grants helped raise prices. Since then however they have come back down.
Today, nationally home prices are up 6.5%. Process have picked up in Melbourne (10.7%) and Sydney (8.4%), but lowered in Perth (1.8%) and Brisbane (0.7%).
Impact of climate change policies
The Federal Government has awkwardly put this issue on the back burner, however some kind of carbon pricing looks like it will have to be factored in by businesses eventually. But remember that any drastic changes will have a long phase-in time factored in.
Inflation and Deflation
The high Australian dollar is putting pressure on the retail sector to lower prices (leading to deflation). At the same time, the price for services continues to increase, leading to inflation, or at least cushioning the deflation. At the same time, the general risk weights stronger towards inflation, as we and the US are in a period of strong government stimulation.
When Will Shares Return to Record Highs?
Most observers believe that it will take another three to four years for the stockmarket (both the ASX and the All Ordinaries) to reach back up to 2007 pre-GFC levels. After the 1987 crash it took the market seven years to reach a similar crest.
Is The Job Market Tight?
Unemployment has lowered, but not all the way back to pre-GFC levels. There are two factors to consider here. One is the cut to migration. The labor market works on a supply and demand law, and the cut to supply will have an inflationary effect. The other factor is that while more people are finding work, they are working less hours. This results in lower productivity and under-utilisation, which means that overall the job market is not particularly tight.
From 2010 to 2011
Economic recovery has been a core theme throughout 2010. This has been mirrored in some of the years main issues - China, India, taxation, superannuation, the commodity boom, housing, recession, GFC, rate cuts and debt. While some measure of volatility looks set to continue, let's look towards a year when the theme of economic sustainability rises to the fore.