Outlook for 2009

Australian GDP growth may fall to 0.7% in 2009, which will be the weakest year since the 1990/1 recession, according to AMP Capital head of investment strategy and chief economist, Dr Shane Oliver.

“During the next 12 months we will see a couple of quarters of negative growth and probably a mild recession but we will do better than the US, Europe and Japan. Current valuations in the share market are quite attractive but it’s too early to be sure we have reached the bottom. The market will anticipate better economic news, with stimulus packages starting to bite in the second half of 2009 and 2010,” he said.

Oliver expects commodity prices will begin to recover after falling close to 50%, during the second half of 2009 as global growth prospects improve.

“Resources will recover over the longer term when global confidence returns but broader equity markets will be back on a rising trend from about February or March next year. China will bounce back strongly in late 2009 when the industrialisation process will re-accelerate,” he said.

Oliver anticipates that shares and listed property trusts will do better in 2009 and Asian share markets are likely to rebound.

Investment grade credit debt is currently experiencing the highest credit spreads since the 1930s depression, which means investment grade credit may outperform equities over the longer term because of higher yields. Cash has been king for a long period but cash rates will come down close to 3% and will stay at this rate for some time. Government bonds will do well with yields pushing down to around 4%, providing capital growth for investors.

Oliver said the biggest risks to the Australian economy are high household debt and house prices.

“If house prices slide too much, we risk entering a debt-deflation spiral where sliding house prices trigger further falls in spending, which in turn trigger further increases in unemployment and further falls in house prices and so on,” he said.

While rental yields are rising in Australia, at 3.5% and 5% on units, they are still considerably lower than in the US, where housing yields are around 7%.