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Business Outlook, September 2011: Will Europe blow?


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19 October 2011: According to the Deloitte Access Economics Business Outlook for the September 2011 quarter, the self-inflicted wounds of Europe and the United States continue to hurt global growth which peaked in 2010. While a re-run of the global financial crisis is not expected, growth may be well below trend in 2011 and 2012.

Chris Richardson, Partner at Deloitte Access Economics, said that, against this backdrop, it may surprise some that the outlook for the Australian economy has not actually changed significantly in recent months.

“While families save rather than spend, government stimulus winds down, the still strong $A has boosted imports and eaten into exports and, outside of mining, corporate capital expenditure plans are modest, Australia has two big aces up its sleeve – there is still a lot of recovery to come from the floods and cyclones of early 2011 and, more importantly, coal exports will jump through to early 2012, providing a large one-off boost to growth,” he said.

“Mining capex is not only going like a train, it has momentum that is hard to stop and, with a lot of bad news around, the impact of China remains a shining light – the announced investment pipeline could still keep growth going for the better part of a year.”

So, despite the ‘two-speed economy’, economic growth is expected to continue to recover. ‘More of the same’ will lead to great strength in engineering construction and mining, but also leave most other sectors travelling more slowly – especially manufacturing.

“What has changed – and dangerously so in recent months – is the downside risk to Australia’s outlook due to what is happening in the US and Europe. The Eurozone probably poses the biggest risks of all, as the troubled economies on Europe’s periphery have costs which are well out of line with the rest of the region. Enormous pressure on the euro could expose Europe’s banks to a significant number of bad debts and send a shudder through global markets,” Mr Richardson said.

A number of workforce drivers remain an issue. ‘People power’ is flagging and businesses, and government, need to develop innovative responses to the looming skills shortage now. Productivity is poor and, with many older workers set to retire, the lift in the birth rate in recent years will not add to worker availability until the 2020s.

For now, China’s strength continues to dominate the bad news out of Europe and the US, meaning that operating conditions across the sectoral landscape should generally show more of the same – great growth potential in engineering construction and mining, with spill over strength to business services, but worrying news in most other industries.

“Commodity booms are currency booms, and they also boost interest rates. Current strong interest and exchange rates hurt the non-resource states, whereas the leap in engineering work which followed the leap in commodity prices has helped Western Australia and Queensland. Now Queensland is shaking off its natural disaster impacts, there is evidence of a growing gap between growth rates in Australia’s north/west and the south/east,” Mr Richardson said.

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