Economic pain to be shared unevenly

It is a puzzlement shared by economic forecasters paid tidy sums to come up with sensible views about where the economy is heading.

Bill Evans, a veteran economist at Westpac, set the cat among the pigeons earlier this month tipping four interest rate cuts over the

next year.

Wow. That must mean our economy is really in the toilet. All that grim news we have been reading about offshore angst, retail income dropping like a stone and "recessionary" consumers must be right.

The last time we had two or more consecutive rate cuts was when we first started tipping into the global financial crisis in 2008.

And the time before that was right back in 2001, in the mire of the dotcom fallout.

But hold on a second. Isn't this the same economy that is enjoying historically high terms of trade? Isn't our employment rate very low? Isn't our national income steadily increasing?

Well, yes, all those things are true. And that is why Bloomberg shows US investment bank JPMorgan Chase is predicting two interest rate rises later this year, presumably to keep a lid on our galloping economy.

OK, let's hold it right there. Four interest rate cuts over the next year do not square with two interest rate rises by December 31.

ANZ put the icing on this muddled cake when it tipped on Friday that the Reserve Bank would raise rates at its meeting tomorrow.

Without wanting to be a rather uncomfortable fence-sitter, I would suggest the pictures held by opposing economists show the great difficulties facing the economy in the next couple of years.

Yes, we are in the midst of a mining boom that promises the transmission of great riches to large sections of the people.

And yes, equally, we are in the midst of a period of great consumer angst and uncertainty in many industries that threaten to punish large sections of the people.

Unfortunately, the gains enjoyed by the former may rather perversely exacerbate the problems experienced by the latter.

In the first category, you have the people who benefit from a mining boom. Miners, of course, construction workers, the services industries that sit around them and the transport industry.

In the second category, you have industries that are hit hard by either poor consumer sentiment or a strong currency: discretionary retailers, media, domestic-facing manufacturers or exporters of any kind (including tourism and education).

Now for those thinking the argument above can be summed up as a "two-speed economy", I would encourage them to contemplate just how different these speeds might be.

Could they be forward and reverse?

This very possibility is being considered by some of our wisest fund managers.

Ross Barker is the chief executive of the Australian Foundation Investment Company (AFIC), which specialises in investing in the bluest of blue-chip companies.

It prides itself in placing its money in businesses that are most likely to succeed over the longer term: for example, Barker well remembers the stick he received when he did not invest in pointless dotcom companies.

It would be fair to say Barker, quoted in an edited transcript below, is thinking very seriously about dumping companies that belong to the "reverse" category in favour of those in the "forward" category.

"The concept of two speeds is well accepted. I'm not sure that people have yet understood the consequences ... that one speed might be slow, even negative," he says.

"If you accept that there is a fairly long-term, sustained support for the resources industries, you then have to ask the question what parts of the Australian economy will be on the other side of that.

"I think one of the things we're focusing on as a longer-term investor, is with the impact of the resources boom, what it's going to do to industrial companies in Australia, particularly as a result of a high Australian dollar.

"That's put many of the companies in a fairly tough environment, particularly [if you] add to that that consumers around Australia are nervous about spending."

Barker's analysis stretches to almost every large industrial company on the Australian Stock Exchange. But it becomes particularly pointed when considering manufacturers or fabricators such as BlueScope Steel .

Barker again: "The question is whether there will be a significant number of manufacturing companies that either move their operations offshore or say it's all too difficult."

He says over a ten-year period, AFIC's investment portfolios have gained much greater exposure to the energy and resources sectors. AFIC still regards banks as a sound investment. But industrial companies are being looked at hard.

In short, the economy is embarked on a broad shift that we have only started to understand.

We have heard of "two speed" but the full extent of its impact has not registered. We have heard about "Dutch disease" but we have not perhaps understood just how "hollowed out" an economy can become as it focuses purely on one industry.

An Australian dollar above $US1.09 looked like a mirage when it first occurred.

But what if it stays at that level for years? And note well, the bullish commodities boom forecasts go long beyond what the US does with its debt or what Europe does with Greece.

The answer about how you feel about the economy may well depend on whether you are forward or reverse.