The year of living anxiously

YOUR typical new year's resolution is made at the end of one year and dropped at the start of the next, a life cycle of only 24 hours, which is pretty much true of economists' forecasts.

Of course, this hasn't stopped some of the worst performers having another go this year. Oh well, that's what I'm paid for.

Still, to be on the safe side, I went back to what I wrote this time last year (best to get in first, I always say) about 2008's prospects.

The answer was ... nothing.

How lucky was that? Mind you, I did talk about the US going into recession, as did everybody else except the Bush Administration, which only made it even more likely.

So here goes for 2009:

THE 'R' OR 'D' WORD

There's no disputing the economy will be in recession - and let's not quibble how it's measured since I promise you'll know when you're in it - for the next six months.

Um, six months?

Such a short slump with a recovery in the second half of the year sounds more like wishful thinking than hard-headed economics. Frankly, the last half of next year is more likely for a proper recovery.

For one thing, the industrial world is in a deepening recession with the last economy standing, China, looking shakier by the day.

Europe, and probably Japan, are somewhere between a recession and a depression.

The Bank of England has dropped official interest rates to their lowest level since records began (apparently in 1694).

And I don't need to mention the fragile state of the global banking system except to say it's on government-financed life-support.

Australia is seen by many economists as a special exception in a world of shrinking economies because (a) we have a budget surplus and they don't, so we can do more to dig ourselves out of the hole (b) our banking system is more solid and (c) we're luckier.

Want to bet?

Take (a), for example. We might have (or used to have) a budget surplus, which represents a minuscule proportion of the total economy by the way, but we have something far worse than other nations: a huge and unsustainable level of consumer indebtedness, which will take a while to unwind, and a high foreign debt.

Which brings me to (b). A sound banking system? We don't know that for sure. Since Australia will be the last to go into recession because we had such a strong tailwind of rocketing commodity prices, we haven't seen the full impact of rising bad debts yet.

And, like our US counterparts, we've already seen evidence of some very silly lending.

It's not as if our banks are somehow immune from the global credit crunch anyway. They're up to their necks in it because they're the ones that have been running up our foreign debt (aided and abetted, it must be said, by you and me - they wouldn't be borrowing if we weren't doing it as well).

As for (c), luck is always a possibility but you wouldn't want to count on it.

So, if anything, we're more vulnerable to the shocks of the global credit crunch than our trading partners. It's just that the commodities boom bought more time - borrowed, unfortunately. Remember our export contracts were struck at peak prices for iron ore and coal. That windfall gain will almost certainly be wiped out in the new contracts for this year.

If a 30 per cent or 40 per cent jump in the terms of trade in one year can fend off recession for so long - even as the Reserve Bank was jacking up interest rates - imagine what the reverse might do in the middle of a global recession. Far from recovering in the second half of the year, the economy could well take a decided turn for the worse.

HARD LABOUR

That unemployment will rise is a foregone conclusion. Unfortunately it's no consolation that the number of jobless in the official statistics hasn't risen much so far because the job market is always the last to go into recession.

But to get an idea of what's coming, you only have to look at the US, where unemployment is at just over 7 per cent and rising. In Australia it's 4.5 per cent. Most economists predict 6 or even 7 per cent by the year's end.

Savage staff cutbacks in the finance sector haven't shown up yet but the latest plunge in the ANZ's job-vacancy index is spine-chilling.

This sure won't be a year of pay rises or bonuses just hanging on to your job should be achievement enough. Shrinking super won't help either. Baby boomers are more likely to postpone retirement, creating a bottleneck further down the food chain.

PRICE IS RIGHT

At least inflation has disappeared as a threat. For the time being anyway. In fact, the bigger worry is deflation, where falling prices drag the whole show down.

Take the oil price. The lower it goes, the weaker demand is and so the deeper the global recession must be.

The days of petrol at $1.50 a litre now look a lot better than they did at the time.

Unless the dollar collapses, a possibility that can never be ruled out, petrol below $1 a litre will become the norm as the year unfolds.

Economists expect the annual inflation rate to slip from 4 per cent to 3 per cent by mid-year and it could get even lower if a build-up in inventories forces price discounting.

By the same token, the fall in capacity will also push up unit costs, so don't get too excited about bargains coming up.

The Australian Retailers Association is even warning it's better to buy now - Kevin Rudd will be pleased - than later when prices will be higher. But then it would say that. If you go by the economic trends, it's more likely to be the other way around. As demand weakens, retailers will have to discount.

The complicating factor is the dollar. Normally it would be pushing up import prices, except that exporting countries are struggling to find markets.

China has almost certainly over-produced, judging by the precipitate fall in its exports, so that should keep prices down.

Not even food prices, touch wood, are likely to be a problem.

Barring a drought, floods or both, there is downward pressure on food prices thanks to falling oil prices. As well as cutting freight costs, this reduces the cost of feed for livestock.

The lower oil price will also help the land war between food and fuel where crops are switched to ethanol production. A lower oil price makes ethanol production from grain and corn less profitable.

DOLLAR BLUES

Another slide in the dollar would change everything it would be good for jobs but bad for prices. Considering the awful outlook for commodity prices, a dollar closer to 50 US cents makes more sense than one that has of late been approaching 70 US cents.

All it has going for it is that our interest rates are higher than just about everywhere else, which makes our bonds an attractive investment for anybody looking for something safe and boring. Yet in a credit crisis even that might not be enough.

We have one of the biggest current account deficits in the industrialised world, a huge foreign debt relative to GDP and a household sector that spends more than it earns.

In a world where debt has become anathema, that's not a safe place to be.

Then again, the past few years have shown that the value of the dollar depends more on what the US currency is doing than anything going on here. Even when it was approaching parity, that had more to do with the then-sinking US dollar than the commodity boom.

Despite the appalling state of the US economy, the US dollar is on a roll just because it's seen as being safe.

When the markets are panicking, they naturally retreat to the safety of government-guaranteed, low-interest-paying bonds.

Eventually they'll realise they're being silly, but it could take a while.

And by then the debt-laden Australian dollar might not be looking much of an alternative.

BANK ON IT

This is especially true as the Reserve Bank slashes interest rates with a vigour never suspected before. Rates are coming down around the world and the Reserve won't want to be the odd one out.

Economists are tipping another 0.5 percentage point cut at the minimum next month and at least one more after that before June.

Since inflation is falling, there's nothing to stand in the way of rate cuts. Oh, except for the dollar.

The real question is how far the Reserve is prepared to let it drop. Judging by its track record, the answer is whatever it takes.

And in this climate a weaker dollar will arguably do more good than harm.

MARKET MAYHEM

Incredibly, the experts are tipping a much stronger sharemarket by the year's end.

Recent surveys have economists, brokers and fund managers predicting the sharemarket will rise 1000 to 1500 points this year.

Fanciful as it sounds, they do have history on their side. In the only other bear markets that were as severe as this - 1929 and 1974 - the subsequent recovery was quite spectacular. It also began well before there was any sign of a broader economic recovery.

Even so, that's no guarantee it'll happen this year. The 1974 bear market lasted 21 months and 1929's went for years, so by comparison this one is still in nappies.

The next shockwave will be the reporting season that begins next month analysts are expecting profits to fall by up to 30 per cent for the financial year. that means lower dividends.

REALTY BITES

To the great disappointment of many, the sharemarket's collapse hasn't prompted a rush into real estate. On the contrary, all asset prices are on the slide and property is no exception.

If anything, the weak sharemarket is contributing to property's malaise, at least at the top end of the market.

But Australia's record level of immigration is expected to spare property the sharemarket's fate, on the grounds that the new arrivals will have to live somewhere.

That's assuming they'll still be arriving in record numbers and, having got here, can find jobs. The same goes for the argument about lower interest rates and the first home buyer scheme. Normally they'd be a boost for the property market.

The only thing is that when it comes to buying a home, an even bigger consideration than interest rates and government handouts is job security. So the only thing that'll be going up in terms of real estate will be rents.