Business Succession PlanningDolfinwise Super Strategies

November 2009 Economic Snapshot

Key points: The highlights over the October month include: an increasingly hawkish stance being embraced by the Central Bank, a housing recovery that is gaining momentum, a positive reassessment of Australia’s economic
prospects, wobbles on world stock markets, UK breaks new recession record, and the US recording 3rd
quarter growth which follows France, Germany and Japan out of recession.

The Central Bank did what might be termed the ‘not unexpected’ on Melbourne Cup Day and added
another 25bps to the cash rate. This was seen as neither bold nor conservative but prudent at a time that
all the local assessments and reassessments of Australia’s immediate and medium term economic
prospects were on the ascendancy. As we noted last month, a second rise in the cash rate was likely pre
Christmas. However, outside of some positive news in the next 30 days, it is now anticipated the next hike
would be more likely in the New Year and possibly as late as February. If the RBA did wait till February –
and the economic signposts remain positive and building –some economists believe it could be 50bps.

The midyear Fiscal and Economic Outlook announced by the Treasurer, Wayne Swan, was decidedly
upbeat, with:

1. The economy is now expected to grow 1.5% Financial Year 10 (c/f contraction by 0.5% forecast in the
May 2009 Budget).
2. The peak in the unemployment rate is now seen at 6.75% (FY10; c/f 8.5% previously forecast in FY11).
3. The budget deficit forecast is little changed - at $58B FY10.

It is against this positive fiscal assessment that monetary policy is likely to remain on the front foot and
interest rates should rise. We have remarked on several occasions in previous newsletters that excess
liquidity (large budget deficits and associated economic stimulus measures) while necessary during the
global economic meltdown; create a hangover that can only be redressed through aggressive monetary
policy. That response can be mitigated by accommodating Fiscal policy, although it would appear the
Federal Government – facing an election in 2010 – will keep Fiscal policy loose and the Central Bank will
unavoidably have to keep Monetary policy tight. Only the strength of the A$ could avoid the unavoidable -
that and some less robust economic news. We note that some respected economists are reported as
saying the A$ will retrace back into the mid 65c level during 2010.

There are unfortunate parallels to the late 1980’s when monetary policy was kept similarly loose and
fuelled rapid house price increases. During the late 1980s, the boom was largely concentrated over the
two year period to the March quarter 1989, which recorded real house price rises of around 35%. That
boom however, was not enjoyed nationally and house price growth was more concentrated in Sydney /
Perth and, to a lesser extent, Melbourne. The recent general improvement in house prices and buyer
interest has been broader and that is a function of low mortgage rates, population pressures and specific
Government initiatives such as the First Home Owners Grant.

That said, others are suggesting a modest or even negative view on the housing market – ANZ’s Head of
Property, Paul Braddock, for instance suggested recently that housing affordability will reduce significantly
in 2010 and house prices will “decelerate”. He may be right but the broader market is anticipating a more
bullish outlook (BIS Shrapnel is forecasting house price growth of 12-23% over the two years to 2012).
Rest of World.

We should spare a thought for Gordon Brown, the UK Prime minister, who has the unfortunate legacy of
presiding over the longest recession in UK history – meeting that unfortunate milestone for the September
quarter 2009 which was the sixth consecutive quarter of negative growth – and facing an election by no
later than May 2010. However, a survey conducted on 2 November 2009, showed that British
manufacturers were “increasingly optimistic about the recovery of the British economy”.

The US economy grew in the 3Q09 for the first time in a year, heralding the possible end of the worst
recession experienced in 70 years. It is estimated that the economy grew at an annualized 3.5%, the
fastest pace since 3Q07 and after contracting 0.7% in the 3 months to June. The economy fell into
recession in the 4Q07. This result was more than a little nudged by the Presidents $867B stimuli spend.

Summary

There is clear evidence that Australia has made it through one of the bleakest and disconcerting moments in
our recent recorded economic history. Others have also climbed out of the abyss (Japan, Germany and
France, amongst the developed nations) while others, like the US, have a foot in both camps (one in the
abyss, one out). The UK is probably still struggling but at least it looks like it won’t be emasculated. With Asia
appearing to be well and truly back in the black and building again (Japan is not included in this assessment),
we can all start looking forward to Xmas festivities albeit tentatively.