Some Australian Economists Predict

February 23, 2011

A.  Australian Share Market


This article is a partial summary of an article published in Issue #536 of IFA Magazine, January 2011.


"The second year after a major bear market ends often sees volatile trading and poor returns from shares as investors are fearful of either a double dip back into recession or the removal of stimulus measures."

So says the Chief Economist of AMP Capital Investors Shane Oliver , who continues that "the experience of past cycles points to the resumption of better returns in the third year" and it is his expectation that this is what will occur on the year ahead.


There are several reasons for his optimism


  1. Australian shares are starting the year reasonable cheap
  2. The continuing economic recovery, both globally and in Australia, should underpin further gains in profits; with an expected profit growth of about 12% in the year ahead.
  3. The corporate sector in the USA, Australia and in other major countries is cashed up
  4. The global monetary and liquidity backdrops are very stimulatory
  5. There is a good chance that fund flows could reverse in favour of shares over bonds in the year ahead as investors realise the global and Australian economic recovery is continuing.
  6. This is the third year in the US presidential cycle, a time which usually sees above average share market gains as economic policy becomes stimulatory in assist the incumbent president.


Whilst there are plenty of potential threats to keep an eye on, Shane Oliver expects that the Australian ASX 200 Index to have risen to around 5500.


B.  The Australian Economy


Chris Caton, Chief Economist of the BT Financial Group is also optimistic and believes that 2011 has started "with a fair head of steam", and his best forecast is that the economy will continue to do well, but with interest rates rising again, with an assumption of two rate increases in 2011. 


Reasons for his optimism include that employment has increased by 3.7% in the past 12 months, and he believes the mining investment boom still has a long way to run.  Whilst there are always risks, he believes that the risks relating to the possibility of a slowdown in China, the chance of a double-dip recessions ion the US and an event emerging from the continuing debt problems in the eurozone have all been overstated.  He considers that the greater transparency in world economies and the financial sectors has afforded a better understanding of what assets are held and their values, and in the event of a partial or full default, it would be clearer and survivable due to the reduction in size.


On the domestic front, the risk is the widespread flooding however, as serious an event as this is, history suggests economists tend to overestimate the economy-wide effects of disasters, whether natural or manmade.  There is no question that the flooding will impede mining production and it will clearly drive up the prices of many fruits and vegetables, however the water will soon all have receded and the gains to GDP can be expected from all the reconstruction activities, and the floods may have postponed the next interest rate rise.


Chris believes the Australian dollar is overvalued, and the Australian shoppers and travellers should expect their sprees to be short lived since he believes fair value for the ASUD will be 85 US cents by the end of 2011.

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