The AMP’s chief economist, Dr Shane Oliver, says that as we approach the one year anniversary of the bear market low in shares (Australian shares bottomed on March 6, 2009 and US shares bottomed on March 9) things are vastly different; the economy is much stronger than expected and corporate profits are recovering solidly.
He said the reporting season wrapped up this week with some encouraging signs:
In terms of net positive surprises the reporting season just ended in Australia is the strongest since August 2007.
Profits have now bottomed and with the economy picking up pace and costs well and truly under control profits are likely to rise by around 20% over the next year.
The upswing in the global profit cycle is pretty much a global phenomenon, albeit most evident in Asia and the US.
As a result of the recent correction in shares and upwards revisions to earnings expectations shares are now slightly cheap.
Stronger earnings are likely to be a key antidote to worries about sovereign debt and monetary tightening in some countries this year.
Australia’s December quarter GDP came in slightly stronger than expected, with growth of 0.9% in the quarter which, combined with upwards revisions to growth in the previous two quarters, resulted in growth over the year to the December quarter of 2.7%.
This is the strongest pace since March 2008. While the impact of fiscal stimulus was clearly evident in strong public investment, private sector spending is also strong, particularly in terms of business investment.
Net exports detracted from growth.
There are several points to note.
First, Australia’s growth performance remains stellar compared to other advanced countries – Australia’s growth of 2.7% through 2009 compares to just 0.1% growth in the US, a 0.4% contraction in Japan, and a 2.1% contraction in the euro-zone and a 3.3% contraction in the UK .
Second, the Australian economy has turned the corner on the GFC-inspired slowdown.
Our leading growth indicator is pointing to growth accelerating to at least 4% by the end of this year with business investment, housing construction, public investment, consumer spending and the boost to national income from higher export prices all likely to be key drivers.
Thirdly, the upswing in Australian economic growth is coming in much faster than anticipated by both the RBA and the government.
For example, the most recent forecasts from the RBA were for growth of 1.75% through 2009 and the federal government’s mid year economic forecasts from last November also implied growth of around 1.7% though last year, whereas the outcome has been 2.7%.
The strength in growth is consistent with more interest rate hikes ahead, a much lower than projected federal budget deficit for 2009-10 (probably more like $38bn than the government’s recent projection of $57.7bn) and increasing pressure on the federal government to tighten fiscal policy.
Finally, the strength in growth is positive for profits and hence Australian shares and will help underpin further gains in the Australian dollar.
Our year end forecast for the Australian share market remains 5600 and we still see the $A breaching parity against the $US some time in the next six to 12 months.
