It’s a brave call not to be pessimistic in this environment. Analysts appear to be falling over themselves in the bearish stakes and while the news flow is undoubtedly bad, I think looking into next year there are some good reasons to be feeling comparatively optimistic about things.

I know uncertainty is high but there are some very good reasons to believe next year will be party time for those with safe jobs. Here’s why:

  • Australia typically has not had a recession unless we’ve had to deal with a housing inventory overhang (such as in the US currently) or a business investment glut. We’ve had neither. There is no doubting that both of these sectors are set to post sluggish growth in the near-term, yet I don’t think the stars are aligned for a complete collapse in activity sufficient to throw the economy into recession
  • In past recessions, policy ineptitude played a large part in driving the economy into recession. This time round both monetary and fiscal policy have worked hard and fast to forestall the worst
  • Importantly the real cash rate is currently close to zero. It has rarely been lower
  • Yes, home lending has been weak and house prices have fallen, but that’s in response to the discount variable mortgage rate pipping 9% and a real mortgage rate of over 5%
  • The credit crisis has blunted the usual transmission mechanism and credit has tightened. That said, it hasn’t frozen up — business credit growth is still robust overall. Further, compared to the cost of funding, mortgage rates remain high and so should continue to fall. Already the discount variable rate is 7% and 3 year fixed rates are about 6.9% (both lowest since mid-2006). The real mortgage rate is about 2%. Home lending is set to accelerate
  • As spreads normalise we should see the variable mortgage rate approach 5.25% (lowest since 1965) if the cash rate hits 3.5% or 6.25% (lowest since 2002) if cash only hits 4.5%. Either way, it’s a great environment to gear-up
  • House prices tend to respond to free money by rising — so do stocks. This should stimulate housing construction activity and buttress household wealth. Both of which also argue against a recession
  • A modestly rising unemployment rate should prove no obstacle — in 2003 when house prices peaked, the unemployment rate averaged 6.2%
  • So I reckon third quarter 2008 to the first quarter of 2009 will prove to be a period of ongoing consolidation and household balance sheet repair. House prices will probably continue to fall through the third quarter and into the fourth quarter, before a pick-up in first quarter 2009 and beyond
  • Global growth is still a big swing factor. If it completely capitulates then clearly the above analysis changes — the unemployment rate will surge. No one is going to borrow if we’re headed for a depression. So this is what we have to track to see whether I’m on the right path. But barring Armageddon, I reckon things don’t look disastrous for Australia

The point is a zero real cash rate is a rare event — it should stimulate domestic demand sufficiently so that we avoid recession. The 90-94% of those still in jobs will probably never have it so good again.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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