Australia turns blind eye to crisis
Australia was able to boast last month it was one of the fastest growing economies in the world, with official figures revealing gross domestic product had jumped 4.9 per cent in the year to March.
Unfortunately, it will be a long time until the country sees such an impressive growth figure again. As the impact of the Asian crisis is increasingly felt, it seems highly unlikely the government can achieve its forecast economic growth target of 3 per cent for the year to June next year.
Among those who dismiss the government's forecast is the country's biggest bank, National Australia Bank, which predicts growth of as little as 1.75 per cent this financial year. Supporting the gloomy economic outlook is the latest survey of industrial trends by Westpac Banking Corp and the Australian Chamber of Commerce & Industry. The latter suggests there has been a slump in business confidence and profit expectations.
A recent Manufacturing Trade Industry Association survey reveals that only 30 per cent of manufacturers are operating at busy or very-busy levels, and that sales and orders are dropping off. Recent data from the Australian Bureau of Statistics also indicates consumers are delaying discretionary spending and that growth in the housing sector is starting to soften.
Meanwhile, analysts are still bearish about the outlook for the Australian dollar, which has recovered from its recent low of 58 US cents to about 61.6 cents. Westpac economist Bill Evans expects the aussie to slide to about 55 US cents in the second half of the year - although he does forecast the currency to move back to 65 US cents by mid-next year as commodity prices climb out of their cyclical trough.
'As markets become more disillusioned with Japan's lack of commitment to genuine structural reform, the Australian dollar will again come under pressure, due to further deterioration in the commodity outlook,' Mr Evans said.
More than 60 per cent of Australia's exports go to East Asia, with Japan - which has officially moved into recession - its largest trading partner.
The prospect of a slowing economy and the possibility of rising interest rates due to a weak currency suggests the Australian stock market will struggle to make gains over the next year. This scenario suggests investor interest in banking stocks should start to wane. If the economy slows, there will be less demand for finance, especially from interest-rate sensitive areas such as housing.
'The halcyon days of investment in bank shares may be over,' according to Shaw Stockbroking. It sees the possibility of future profit downgrades for the banks and believes 'the sector remains vulnerable to further widespread selling'. Four of Australia's eight largest listed companies are banks.
Weaker growth and rising interest rates should, in theory, dampen prospects for Australian industrial stocks. Strangely, however, many stock brokers and executives seem bullish about earnings prospects for the industrial sector. ANZ Stockbroking, for example, forecasts only seven of the 118 industrial stocks it monitors will report lower earnings per share (EPS) growth in the year to June next year. ANZ is tipping average EPS growth of 11.2 per cent - a pretty brave call given the uncertain domestic and regional outlook.
There also seems to be a widely held belief among Australian companies that the Asian crisis is only a short-term problem, or a one-year phenomenon. According to a survey by stockbroker Macquarie Equities, many leading industrial and resource executives believe the crisis will only affect their businesses for the next year or two.
'Companies are confident that the long-run effect on sales will be minimal; within two years, 75 per cent believe sales will be equal to or exceed the level prevailing before the crisis,' according to Macquarie Equities head of research David Rickards. Half expect higher sales and 3 per cent expect much lower long-term sales.
Another survey by the Australian Institute of Companies Directors found 73 per cent of executives polled believed conditions in Asia for their own companies would improve within a year. If such expectations prove fanciful, there could be a raft of profit downgrades or asset write-downs over the course of the next year that could deliver a big blow to investor confidence in Australia.