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Pessimists are disappointed

Twelve months ago we expected the world and Australian economies to display the following characteristics:

• A deepening of the Asian crisis

• Consolidation of the Australian dollar to around 65 to 67 cents against the $US

• No appreciable movement in the residential property market over the next twelve months

• Unemployment to increase rather than decline

• Growth in GDP expected to be around the 2.75% to 3% mark rather than the budget forecast of 3.25%

• Current Account Deficit to increase as the Asian crisis deepens

• Interest rates to be unchanged

• Inflation to remain below 2%.

So how did we do? It appears we, like most other forecasters, were surprised on the upside by the Australian economy. The growth rate in the GDP came in very much higher than we had anticipated.

The Asian crisis did not deepen and it appears that some of those economies may have bounced back. The infrastructure changes that are required there have not been undertaken but the currency and stock markets appear to be responding to some of the IMF rescue mechanisms.

The rest of the forecasts appear to be accurate. Now, what of the next financial year? This is how we see the world.

Continued slow growth in world economies. It is unlikely that world growth will rise much above the 2% mark. This will mean that commodity prices remain subdued with little demand for our resources and commodities coming from overseas.

Decline in the value of the Australian dollar against the $US. The continued low commodity price cycle will ensure that our dollar does not rise much from its current level. It is also probably fair to say that the bounce back in recent weeks has been overdone and that traders generally feel that the dollar is likely to decline before exhibiting any further strength.

A slight (approximately 25 basis points) rise in interest rates over the next twelve months. The reasons for this are twofold. Firstly, the introduction of the GST will cause an increase in the inflation rate. Even though the GST doesn’t come into effect until1 July 2000, there will be some administrative issues put in place before then. This could well see a few price rises. Secondly, the increase in interest rates in the US will have some flow through to us. Despite Ian MacFarlane’s comments to the contrary, we will see some impact on us here.

The current account deficit remains the biggest blight on the economic landscape. There is little that governments have done in this regard for many years. This is unlikely to change over the next twelve months. It is expected that the CAD will increase from its current level before seeing any reduction.

No change to unemployment. The economy needs to grow at a rate of 4.5% to make an appreciable dent in the rate of unemployment. This year’s growth forecasts are for growth of around 3.5%.

Inflation starting to tick up. This will be the reason for the increase in interest rates.

No appreciable movement in residential real estate prices for the next twelve months. The only qualification that I make here is that there could be an increase in the demand for property as some buyers try to get in before GST-caused price rises occur. This could push the prices up.

The All Ordinaries Index displaying a rise of approximately 10% in line with last year’s return of 11.3%.

As we said twelve months ago, we will be here in twelve months time and hopefully it will be to say that we were right again.

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