Economic challenges remain
The Australian economy still faces a number of threats to economic growth and the Federal Budget has only helped a little, according to Praemium chairman Dr Don Stammer.
“In the pre-Budget talk, the Government said it would wage war on inflation,” he told an Association of Superannuation Funds of Australia lunch in Melbourne. “However, this year’s Budget is mildly restraining.”
Stammer said inflation would be the main concern to the Australian economy, but there were threats that could cause a blow out in the headline figure.
“Inflation will be a worry if the cost of energy and food keeps rising,” he said.
“It won’t ease either if wage increases accelerate.”
Stammer sees the economy in the next 12 months as being “stagflation lite”.
“This will not be a repeat of the stagflation we saw in the 70s and 80s,” he said.
“If inflation gets out of control, it will do a lot of damage to the economy.”
One victim of rising inflation would be company earnings, while stocks would also fall further.
But Stammer said despite every claim ‘this is the worst ever’, the stock market keeps rising.
His research into stock market returns back to the 1880s shows a rising line with occasional dips.
“The ‘worst ever’ is always followed by a recovery that is stronger.”
While Australia’s stock market will remain lower, Stammer believes the worst is over, but other markets will be erratic, although he claims the talk of a global recession “has been overstated”.
However, some Australians will be subject to mortgage stress for the rest of the year.
“It is a severe problem for a minority of households,” Stammer said.
“Corporate borrowing has been disciplined, but borrowing by investors has been less controlled.”
He believes interest rates will plateau for the next six to 12 months before falling at the end of 2009.
Stammer said it was good for the financial services industry that the Government is creating new funds to put something away for when resources prices fall and the economy goes with it.
“The Government doesn’t need to use any debt at present, but it is keeping a $60 billion bond market active for harder times,” he said.
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