Australia's year of pleasure and pain

The local economic and market environment paints a contradictory picture that needs resolution, and the outcome will have a strong bearing on the next election.

The next two months are going to be crucial for the Australian economy and the stock market.

We have started 2013 with a flurry of contradictions, which will need to be resolved.

Corporate chief executives are coming back from their summer holidays determined to cut costs to match the realism of current demand. Boral and BlueScope are leading the charge.

Not surprisingly there are clear predictions of a rise in unemployment (December unemployment rate expected to rise, January 17). Analysts endorse these sentiments, so are forecasting an interim report season that reveals many disappointing numbers.

But against that backdrop the Australian stock market, in line with global markets, has soared. Part of that increase is a re-rating of the worth of yields given the fall in interest rates and in particular the fall in the attractiveness of bank term deposits (Bank depositors fight back, January 16). In addition, better numbers out of China have boosted miners.

Consumer Confidence as measured by Morgan Research has once again risen strongly in the New Year, driven by increasing optimism about personal finances and buying major household items.

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Some 63 per cent of Australians (a rise of 7 per cent) say now is a ‘good time to buy’ major household items, which is the highest since January 2012.

Now, 32 per cent (a rise of 4 per cent) of Australians say their family is ‘better off’ financially compared to a year ago, while 28 per cent (a fall of 2 per cent) say their family is ‘worse off’ financially.

Most of the opinion polls show a rise support for the Gillard government in line with the rise in consumer sentiment. But the latest Roy Morgan poll shows that the abandonment of the budget surplus and the tough line on single parent pensions has reduced support for the government so coalition support is back up to 52 per cent and the government returns to 48 per cent.

Clearly predicting the outcome of so many contradictions is hard. But let’s have a try. The market probably got ahead of itself on the China resurgence, but there is underlying good news. I am a long-term American bull given its shale oil discoveries, but there is pain ahead given the budget and debt limit debate.

Australia will need to keep reducing interest rates because the high dollar is really hurting. That means shares will continue to be yield plays so chief executives and boards will try and maintain profits in the light of tougher conditions.

High consumer confidence will not be maintained if unemployment rises and consumers begin to fear that a lot more cost cutting is ahead as companies try to maintain profits and dividends .

Dwelling prices should be maintained given lower rates and we will see rises in some areas.

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