Economy may have come off the boil but it's still bubbling along: so cheer up

WE MAY be in the middle of a once-in-a-lifetime mining boom, but 2011-12 has been a year many investors probably would rather forget. The biggest assets most people own superannuation and property have been buffeted by a nasty combination of global weakness and wrenching change in the domestic economy.

WE MAY be in the middle of a once-in-a-lifetime mining boom, but 2011-12 has been a year many investors probably would rather forget. The biggest assets most people own superannuation and property have been buffeted by a nasty combination of global weakness and wrenching change in the domestic economy.

Super funds are set to eke out a 0.5 per cent gain over the financial year, SuperRatings says, while the S&P/ASX 200 is on track to fall 10 per cent after more eurozone turmoil. Capital city house prices have slumped an average 4.5 per cent.

With so much bad news, it's easy to get despondent. Consumers have not been this pessimistic about their finances since the early 1990s recession, a Westpac index shows. Wary investors have quit sharemarkets and rushed to safe havens, dragging government bond returns to record lows.

Yet, in spite of all this, key economy-wide figures suggest things might not be as bad as we think. For one, the pervasive sense of gloom has hardly stopped people hitting the shops.

A TD Securities strategist, Alvin Pontoh, pointed out this week that consumers' bleak mood would normally be consistent with annual spending growth of about 2.5 per cent. In the year to March, however, official data showed a 4.3 per cent jump in consumer spending. "Consumers are saying one thing and doing another," Pontoh says.

Official readings of the jobs market also are stronger than the highly publicised lay-offs of recent months suggest. And it's not just mining jobs that are being created.

In the year to May, the biggest job gains came in professional services, which created 77,600 positions.

JPMorgan's chief economist, Stephen Walters, says this suggests the economy has got far more going for it than just mining.

"Most of the jobs have been created in services like science or health care. That's implying that it's still a pretty decent economy."

As well, many households are about to receive tax cuts or higher benefits. Overcompensation for the carbon tax is forecast to leave many lower and middle-income households financially better off.

People earning more than $80,000 will receive no tax cuts, and many will lose benefits on health insurance. But, overall, the UBS chief economist, Scott Haslem, estimates the wave of payments and tax cuts will help lift households' "free cashflow" (income after interest, petrol, tax and utilities bills) by 8 per cent in the year to March 2013. That's double the 4 per cent of the previous year.

These reasons for confidence, however, have been swamped by the persistently worrying news from overseas. In response, households have been pulling their heads in. They're still spending but no longer willing always to bid up house prices. Housing credit growth has slowed to a record low of 5.1 per cent a year, compared with 20 per cent in 2003.

"They're seeing what's going on in Europe and thinking, 'maybe carrying all that debt is not such a good idea, maybe I should start paring back a bit," Walters says.

The economy-wide effects of this move towards greater caution have become clearer in the past year. Entire industries that profited from debt-fuelled consumption are finding themselves under pressure, with margins being squeezed from retail to banking.

This week's second profit downgrade from Boral in as many months also showed the slow housing market is affecting some manufacturers.

As the year wore on, investors also became increasingly concerned about a slowing in Australia's biggest trade partner: China.

The Purchasing Manufacturers Index, a gauge of China's industrial activity, has fallen to below 50 points, indicating activity is well below average levels.

A fund manager at Pengana Capital, Tim Schroeders, says investor fears of a slowdown have spread beyond China to all the so-called BRICs Brazil, Russia, India and China. "What we've seen is a significant slowdown not only in China, but more importantly economies such as India and Brazil," he says. "Basically they cannot sustain the high growth rates with a developed world that's growing at sub-par levels."

This realisation of a weaker growth environment has sparked a rush for high quality companies that are well financed while speculative mining stocks are out of favour.

"Single project companies that are at the beginning of spending large amounts of capital are extremely vulnerable," Schroeders says.

Finally, it's become clear that commodity prices have probably peaked. The price of iron ore may seem far removed from households, but the fall in prices means the economy is no longer receiving a free boost to national income. This translates to weaker growth in wages and profits.

All up, two of the surefire wealth creators of recent years a buoyant property market and rising commodities prices have come off the boil in the past year. Is it any wonder people are feeling gloomy, even if aggregate figures suggest the economy is still in pretty good shape.

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