One of the more entertaining sessions of the day was by Craig James, Chief Equities Economist at Comsec. He spoke about the challenges and opportunities that lay ahead for 2009/2010 (i.e. the next 12 months). A session that not just accounting people needed to hear, but business people too.

It was one of the keynotes in the larger auditorium and attracted an audience of approximately 1,000 people. A very live and energetic performance to start the day!

Craig would present many numbers, charts and economic facts, but he reiterated that the question that we need to ask ourselves is “so what?”. As in how does this apply to our circumstance, either our business or personal situation – what does this mean for me?

Despite all the negativity we have been reading in the press and in the workplace about our economy, we were shocked to hear that Australia is the ONLY advanced nation that is growing!

Australia is one of of 4 countries to have not gone into recession and was the first G20 country to lift interest rates. So we must be doing something right. We have avoided a recession (two quarters of negative economic growth). The December quarter went backwards, but March and June quarter have gone forwards.

The general impression that we got from Craig’s presentation was that if you looked under the hood, the Aussie economy is quite robust =) We did not feel the same economic shocks as other Western economies such as the US or UK.

Challenges and Opportunities

The challenges and opportunities that we face in the next 12 months are that businesses will realise that the coast is now clear and people will start to come out of their foxholes. Business will start to operate again, at levels they were used to previously. However, this is going to the toughest time for most business as they will start to compete for clients, staff and business. Employers will also look to put on more staff to meet demand. We have also noticed a rise in job advertisements. Australia has survived the recession as this evident by how high and quickly interest rates are going up.

There will be continued focus on China and Asian nations. In general, the world has been in recession. The countries hardest hit have been the major financial centres. However, India and China continue to grow because they are industralising their economies. These economies were growing before the recession and are now ramping up again. The other countries that are experiencing growth are Egypt, Vietnam and Pakistan – three very unlikely countries!

For our domestic economy, Tasmania and South Australia were not affected as much by the GFC. Victoria and New South Wales have been affected the most. This is because Tasmania focuses on domestic markets and not servicing global markets.

China

China has picked up significantly and this economic upturn is strong . We can be confident because it is driven by their own cash payments. Compare this with the US, which borrowed significantly to fund their economic stimulus.

With 1.3 billion people going down the path of industrialisation, this is going to be present a myriad of opportunities. They will want washing machines, cars, tvs, etc…There will be a huge class of people demanding consumer goods. Australia has accounting, marketing, wealth management services which we can offer to support this demand.

China will be passing the US economy in approximately 8 years. Scary isn’t it? And it is our largest trading partner. For further discussion on China, we’ll have a separate post on the China-Asia relations session.

So why did Australia survive the recession?

There were several reasons which Craig pointed out, namely:

• Our infrastructure was strong
• Government acted decisively,
• We drove revenue and incomes higher instead of cost cutting.
• Our largest trading partner is China and they have started to rebound

A fundamental difference between our economy and the US is that Australia has an undersupply of housing. There countinues to be growth in our population driven by migrants and the birthrate. So housing is an area that is growing.

In addition, the $AUD had been decreasing which made our exports cheaper relative to other nations. In particular, this would have  benefited commodities. Also, domestic companies did not go through the phase of slashing and burning staff and costs which overseas companies experienced.

There was certainly fear in the market driven by what was happening overseas. Mainstream media was reporting daily on the financial crisis. It was really the first global crisis in the internet era, which created an explosion of information at our fingertips. We had an awareness of the global economy and we reacted accordingly (i.e out of fear!).

The sharemarket is picking up and wages continue to rise. There are real wage gain which is supporting people. Inflation has also remained at 2%. So in effect, workers have more income and prices have not increased, which means they can purchase more. Petrol prices was also cheap and interest rates were low in the last 12 months. All these factors combined to assist Australia to survive the recession.

The opportunities

There will be opportunities in the housing sector. Obviously this will pick up work for people in construction, but also flow on to others in the industry such as draftsmen, builders, architects.

Education is also a sector to watch. Previously, the government spending was $1.5m a month and the spending will be increasing to $3.8BN (we presume this is annual!). This has potential benefits of spreading money through the economy.

For the job market,  there will be a creation of more than 40,000 jobs. In the past 12 months, businesses elected to hold on to staff instead of making them redundant. This occured by cutting back hours or pay. Effectively, it maintained their presence and service quality.

Other issues

We’ve lumped these together for brevity:

• There was a brief discussion on the AUD. It may continue to rise! So there needs to be a recalculation of inputs and outputs.
• A sign of the recovery will be petrol prices, so ensure you keep an eye on this. Consider what it means for people buying petrol.
• Migration has been at its highest level on record. This adds growth to the economy as it creates demand.
• Changing climate: There is a lot of mention about emissions trading/global warming. We were shocked to hear that the average temperature of cities has been rising. What is the effect on seasonal demand for goods and services?

COMSEC Economic Forecasts

AUD

$0.93 Dec 2009

$0.98 June 2010

Unemployment

6-6.5% Dec 2009

5.5-6% June 2010

Sharemarket

4,900 – 5,100 Dec 2009

5,300 June 2010

Economic growth

Small rise in Dec 09

2-2.5% June 2010

Inflation

2 -2.5% average 2009

2.5%-2.75% average 2010

Insights for tax

The economic signs were positive, business confidence looks to be picking up and so is the job market. For tax, this means that there should be increase in profits and taxable income, and hence tax revenues. This will be further aided by a growing population driven by migrants and birthrate.

Opportunities in the housing sector could mean more sales of property, which leads to capital gains tax.

The Taxabull team is attending the CPA Congress as a guest of CPA Australia.

You can follow us on twitter: twitter.com/austax

Cheers,

Taxabull.