Out of sight...is out of mind...

We have seen significant falls on Wall Street and other global markets. The reasons for these falls differ amongst the sellers of shares, but range from the downgrading of the USA AAA credit rating to AA+, the inability for the USA political system to agree an appropriate strategy to move the country forward, to the overwhelming issues within a number of European countries such as Portugal, Italy, Greece and Spain (PIGS).

Markets are driven mostly on emotion despite what analysts will tell you. Investors are very nervous across the globe about the possibility of a second Global financial crisis. The fact of the matter is we haven't come out of the first one yet. There are a range of important facts which can't be overlooked from both a global perspective and a local Australian perspective.

• The world’s biggest economy, the USA, currently owes about $15 trillion but generates approx. $14 trillion per annum. It has the ability to make the hard decisions to put stability into the system, but of course the politicians have got in the way. We hope these shock waves will take them back to the table to seriously make the hard decisions necessary to provide comfort to the global community that the USA does have the ability to drag itself up out of their financial crisis.
• The European Economic Community (EEC) has its own issues with the “haves” and the “have-nots”. You can put the previously mentioned countries above ( PIGS) into the “have-nots” and countries like Germany into the “haves”. The continuation of any artificial propping up of the PIGS is not sustainable either politically for the “haves”, who are providing the funding but more importantly the “have-nots” need to rebuild to be sustainable without support into the future. We can see some sort of splitting of the EEC in the future possibly done as some pundits are suggesting, by having two different classes of Euro.
• The South Asian (read predominantly India) and South East Asian communities (China, Singapore, Malaysia etc.), have been building financial reserves and internal consumption to combat loss of some international trade as things tighten around the Western world. This is where the current strength lies although they are not totally resilient as China and Singapore have deep ties with China being a major trading partner is the USA.
• The Australian economy is much stronger now than in past financial turmoil, as evidenced by our ability to withstand recession when the GFC started. Forecasters are predicting unemployment could go up around only 1% to about 5.75% - still a very healthy position for jobs.
• The reality is, Australia is much better positioned than ever before to weather this financial scenario. Our reliance on the USA, trade wise, is not as great as in the past. However, we are in a two speed economy with the mining sector going well and retail and small business suffering due to lack of consumer confidence.

I have also included a great summary regarding why Westpac believe interest rates will fall over the next twelve months (please click here to view). I think this is spot on. In thinking of managing services to your customers, we need to be conscious of the environment in which we find ourselves. Any fall in interest rates will be stimulating for the economy, jobs and consumer confidence.

Many of you would not have been working when we had 'the recession we had to have' (Paul Keating) in 1991. Things were extremely tough with unemployment above 10% and businesses going broke everywhere.

We are far from this position and Australia is well placed to benefit from its relationship with Asia (and proximity). What is needed most now is to restore consumer confidence to remove the two speed economy and get small business back on track.