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Sunday, December 11, 2011

Australia Economic and financial forecast 2012

Australia Economic and financial forecast 2012 : Economic growth was tipped at 3.5 per cent in 2011, with unemployment seen at 4.5 per cent by the end of 2011 and the cash rate at 5.5 per cent and share market at 5400. In a ‘normal’ year without the European Debt Crisis and natural disasters, these forecasts would have stood a good chance of success. In fact, around mid-year they were still largely on track.

The economy may have expanded 2.75 per cent in 2011 while unemployment was nearer to 5.25 percent, the cash rate at 4.25-4.50 per cent and the share market closer to 4400 points.

The good news is that inflation will probably end 2011 near the forecast of 2.75 per cent. But the Aussie dollar forecast of 92 US cents will be exceeded with the currency near 102 US cents. We had expected the US recovery to be underway with investors looking to higher US interest rates and thus underpinning a stronger greenback. Still it’s worth noting that just a few days ago the Aussie was below 97 US cents, and seemingly heading lower.

Forecasts for 2012

As always, it is not the numerical forecasts that matter most. Rather, the importance lies in the assumptions taken, the likely direction for the variables and the risks.

We assume that the European Debt Crisis will still dominate over the first few months of 2012. Clearly the ‘end game’ could take a number of forms including the collapse of the eurozone. We assume that self-interest will predominate and that the eurozone will remain intact. Countries will set about the task for reining in deficits and stabilising debt levels as a proportion of GDP.

We also expect that the US economic recovery will continue and China will ease monetary policy, thus boosting growth prospects. The Australian economy should remain in balance with strong investment spending weighed against ‘average’ growth in consumer spending and housing activity.

Risks abound – and mostly to the downside. Political wrangling could lead to the collapse of the eurozone while politics may also stifle the US economic recovery. In Australia, there are also some upside risks. Rate cuts could cause Aussies to spend again and buy and build homes. As a result, stronger consumer and housing activity may coincide with strong business investment, especially in mining regions.

We tip 3.6 per cent economic growth over 2012 – above the norm of around three to 3.25 per cent, but from a low base. Underlying inflation should drift up over the year but remain below three per cent, thus allowing interest rates to remain low. Unemployment should hold in a 4.5-5.5 per cent range over the year.

The Aussie dollar is expected to drift lower to around 95 US cents in the first half of 2012 as weak European economic growth restrains global economic growth. But the Aussie is expected to again be near parity with the greenback in late 2012.

While we would like to be more positive about share market prospects, we retain a ‘soft’ target for the All Ordinaries of 4650 at the end of 2012. Aussie investors are expected to only slowly embrace stocks again over 2012 while global economic uncertainty and a firmer Aussie dollar will also restrain enthusiasm of foreign investors for Australian stocks. For the latest updates on the stock market, visit Stock Market Today

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