Still the lucky country ….?

Posted: March 24, 2010

The International Monetary Fund (IMF) released its latest World Economic Outlook report at the end of January. The headline is that it expects global growth to be 3.9% in 2010 and 4.3% in 2011. The recovery has been driven by ‘extraordinary' policy decisions and actions by Governments. The IMF is now looking at how Governments wind back their stimulus measures and how quickly private demand picks up again.

Digging deeper into the IMF figures reveals significant regional differences. It looks as if the Great Recession was in fact a ‘North Atlantic' recession with the greatest impacts in USA and Europe. Any hiccups in these major economies will affect the rest of the world but the pacesetters now are in Asia and the emerging economies.

Economic growth predictions

*Indonesia/Malaysia/Philippines/Thailand/Vietnam
The projections for Australia are 2.5% for 2010 and 3.0% for 2011.

What does this mean for Australia?
In the 1980s, we suffered from the ‘tyranny of distance' - we were too far away from the major markets of Europe and North America. In the last ten years we have experienced the ‘power of proximity' as most of the emerging markets are in our region. China is now our number one trading partner (almost 15% of trade in goods and services) and together with Japan, India and Korea account for almost 50% of our exports.

Many Australian companies are finding opportunities to expand into Asia in sectors such as education, mining, energy, building, wealth management and telecommunications.

What does this mean for investors?
In the short term, there will be the usual flow of both positive and negative news. How will deeply indebted countries reduce their liabilities? How well will Governments manage the relaxation of their stimulus packages? How quickly will interest rates rise to more normal levels? What is happening to corporate profitability and employment levels?

In Australia we are seeing interest rates creep higher, the removal of the Government guarantee for wholesale funding afforded to our banks and a wind back in stimulus spending. Concerns persist about the level of Government debt but our position is vastly better than many of the North Atlantic economies.

For long term investors, the pace and focus of the global recovery will drive bond and share markets. The fallout from the Great Recession is likely to hang over the North Atlantic economies for many years. The rise of Asian and developing economies (see article about Brazil on page 2) is likely to continue. There will be opportunities for successful investing not just in the emerging economies but in companies that successfully develop their businesses in these regions.