Prospects for 2012 and Beyond

Australia has long been called ‘the lucky country’, and the combination of no recession for two decades, a mining boom, and the nation’s part in one of the world’s fastest growing mega-regions – Asia – has certainly reinforced that tag.

Yet Australia has felt the edge of the cold wind crossing the United States and the chillier winds across the European Union as a result of the ongoing Global Financial Crisis (GFC). Our economic growth has been a lowly 2.4% per annum over the past four years and an anaemic 1.9% per annum over the past three years, both growth rates comparing badly against our long-term average of 3.5% per annum. If this growth is discounted by the deficit spending by government, especially the Federal Government, then GDP growth has been negligible over the past three years. This is a truly poor performance given that we are in the midst of a mineral prices boom, are part of the Asian region growing at 6% per annum that absorbs 80% of our exports, and we have been largely insulated from the GFC.

Australia had no recession, the only OECD nation not to have one in 2009, thanks to the virtual debt-free legacy left behind by the Howard-Costello Government that had reduced our public debt to just 19% of GDP (now 26%) compared with a world weighted average of 88% of GDP at the end of 2011. The United States has just hit the 100% level, many countries are over 100% in the European Union, and Japan’s public debt is now over 220% of its GDP.

We are now four and one-quarter years into the GFC, which may well prove to need a decade of recriminations, mea culpas, re-regulation of finance markets and adjustment pain. Obvious examples of this are Greece and some other EU nations that had taken their state to an absurd and unsustainable level of socialism and universal welfare. The United States is also paying a heavy price for being the world’s police force over many decades without paying the bill with taxes on its citizens, and for the laissez faire conditions in its finance industry after the repealing of the 1933 Glass-Steagall Act in 1999 under the Clinton Administration.

Yes, the debt, budget deficit and unemployment crises are still with us. However, as the accompanying chart shows, the world’s G20 nations that account for almost four-fifths (77.5%) of world GDP are able to service their debts (too high as some of them are) with a small share of their taxes, albeit at the expense of some social benefits.

The PIIGS group (Portugal, Italy, Ireland, Greece and Spain) are the problem, yet account for just 7.5% of world public debt (of which Italy, a G20 nation, represents 4.5%). This percentage is not enough to really wreck the world’s finance markets, unless political leaders continue to be as inept or terrified of their justifiably cranky but financially illiterate populations as they were through most of 2011. There are signs, though, that there is light at the end of the tunnel – rather than an oncoming train or Armageddon.

So, what worries directors going into 2012? Quite a number of concerns, as the following exhibit poses.

However, our economy should perform reasonably well in 2012 and to the end of the current business cycle in late 2018, albeit with the usual sawtooth pattern, as suggested in the third chart. We are not in the habit of having recessions during a long business cycle.

Mining, Infrastructure (engineering construction), Health, Telecommunications, Finance, Professional Services and the new information industries are providing plenty of momentum to offset the slower industries such as Manufacturing, Agriculture and Hospitality.

Even our sharemarket could be poised in 2012 to take a big leap in 2013. Profits are again on the rise and the price-earnings ratio is at a subdued level in 2011, leaving room for quite a spectacular jump when confidence returns to London and New York – from where we take our lead. The final chart suggests there is a lot of upside available: maybe a 50% rise in the All Ords at some stage over the next few years.

Our ASX Top 30 listed companies (on a market capitalisation basis) recovered from two rough years to post a weighted average return on shareholder funds of 19.6% in fiscal 2011. Even deleting the mining companies meant a 16% average ROSF was achieved, also an improvement from the previous two years.

Yes, not all doom and gloom. Having a stable, more commercially realistic and far-sighted government would help, together with a better IR scene, but these might emerge in the not too distant future.

Sourced from IBISWorld dated 10/01/2012, retrieved from www.ibisworld.com.au